2014 saw M&A deals in the global power and utilities (P&U) sector increase by 41% over 2013, a recent EY report highlights. The market recovered to the volume and value last seen in 2010, on the back of strong demand for regulated assets, the influence of institutional investors looking for stable returns and transfer in renewable assets.
In its recently released report ‘Power Transactions and Trends: Global power and utilities transactions review’, global consulting firm EY assesses the M&A landscape in the global power and utilities (P&U) sector, as well as projects expectations for the year to come. The research review found that 2014 was a bumper year for M&A deals, with 474 deals valued at $177.1 billion finding closure, up from 398 deals with a value of $125.4 billion in 2013.
The value and volume of deals differed considerably per sector and region. Particularly the US has seen strong growth in M&A deals on the back of utilities’ acquisition strategies largely focused on accumulating regulated assets to derisk asset bases, acquiring assets outside home territories to moderate reducing energy demand dynamics and purchasing renewable assets to comply with environmental regulations.
The renewable sector has too has been doing particularly high turnover in 2014, with 200 deals at a value of $38 billion being closed. Reasons for the increase in deals were linked to regional factors by the consultancy. In Europe a tightening of regulatory conditions particularly around environmental concerns, resulted in an increase in divestment in the sector – with the region contributing 45% of total deal volume and 22.5% of value. The US too saw strong growth in deals around renewables, with the phasing out of renewable support mechanisms resulting in holders to divest and sell renewable assets, prompting decisions by some conglomerates and primary developers to sell these assets.
Besides an increase in the number of renewable deals, the demand for infrastructure expenditure is placing pressure on the balance sheets of utilities, institutional investors have been “emerging as a valuable buyer pool for P&U transactions” for utilities, participating in 118 deals worth $42.5 billion, a doubling of growth since 2013. A driver for the institutional investors is the relative stability of the assets and their 8% - 9% rate of return. Particularly regulated assets attract high premiums of 15% - 35% over stock prices prior to sale, highlighting their attractiveness to investors.
The European market saw an active M&A period under the influence of increased pressures from regulatory demands as well as privatisation drives from various regional players seeing an increase in available assets. Rather than 2013’s sales of metering services, in 2014 deals centred on networks, sales of operational renewable assets and capital-intensive onshore wind developments. The consultancy notes that “regulatory changes created a challenging operating environment, with many utilities questioning the viability of traditional business models as renewable energy became increasingly representative in the generation mix.”
Dealing in 2015
Looking ahead, EY forecasts that 2015 will be “another robust year for the transactional landscape.” Independent power producers (IPPs) are expected to play a larger role in 2015, thereby increasing volume. This is on the back of the increase in electricity prices which the consultancy sees as sustainable. Another expectation is that large diversified utilities will continue to streamline operations by focusing on stable regulated assets and consolidating positions through bolt-on acquisitions in high-growth regions. The appetite for acquisitions by utilities in Europe is also expected to grow as companies move from balance sheet recovery to expansion.
A further development for M&A activity in 2015 is that utilities may seek to control the supply chain according to EY; utilities look set to shift some investment focus toward vertical integration by acquiring midstream and upstream assets. The drive for renewable energy following continued concerns around the long term consequence of carbon dependence is too expected to increase M&A deals in the coming period, as government policies create or continue to support incentives.
In the developing world an increase in the demand for electrification will see opportunities for investment as well as increase the attractiveness of M&A deals, with more than a billion people still without electricity. With sub-Saharan Africa, where electrification is particularly undeveloped, expecting to develop $8 billion in new capacity, and with Mexico looking to add 1.5GW per year until 2020 – investment opportunities are rife for which EY expects European investor interest.