M&A within the power and utility sector has, according to new report, enjoyed a bumper year. A focus on renewables is taking off across the globe, as their long term value to reduce climate warming to manageable limits (<2.0C) becomes ever more prominent in the face of agreed upon global strategic goals. In Europe, power and utility companies are also seeking to add on technology companies; creating energy storage solutions to support the trend of self-sustained energy generation among consumers, as well as convergence and midstream/upstream investment.
Global M&A activity in a range of sectors over 2015 was buoyant, with a recent McKinsey & Company report finding that total deal value hit $4.9 trillion last year. In a new report from EY, the accounting and consulting giant explores the M&A landscape specifically within the power and utilities space, and looks into the trends that affected deals within the markets as well as the factors likely to drive deals going forward.
Global deals and trends
Across the globe, deal activity in the power and utilities (P&U) sector heated up during the second half of 2015, following lacklustre activity in the first two quarters. Both deal volume and deal value saw significant increases during the latter half of the year, Q3 deal value hit $75.5 billion spread over around 120 deals, while Q4 hit $73.5 billion over more than 170 deals. The year in total netted close to $200 billion in deal value, up from around $177 billion in 2014.
Deal value was driven by activity in two major market segments for the industry; Americas M&A activity in P&U rocketed in Q3 last year (after a slow start to the year) with more than $50 billion in deals; while Asian-Pacific M&A activity hit around $40 billion a quarter later.
According to EY’s analysis of the situation, a number of key trends have driven the increase in M&A activity in the sector. Many companies are, according to the consultancy, using M&A as a strategic tool to adapt to changing dynamics in the sector. One of the key market trends pushing up activity, is a move away from volatile coal and gas assets towards renewables. Many P&U's are looking to meet compliance requirements and long term asset valuation, as the COP21 deal moves regulators and capital investors toward clearer long term sustainable, climate targets. Other trends include: the convergence and midstream/upstream investment (as capital sought regulated safe havens in 2015); the addition of growth capacity in emerging markets by European and American operators; and the addition of businesses offering storage solutions and other disruptive technologies - as the consumer market turns toward off the grid and self-sustainable energy solutions.
European deals and trends
The European market, in terms of deal value and volume, was down slightly in 2014; M&A activity value hit close to $39 billion in 2015, down from around $46 billion in 2014. The majority of the activity in Europe in H2 2015 were in renewables, while in Q1 Transmission and Distribution (T&D) deal activity reigned. Overall, 2015 placed heavy accent on renewables relative to 2014, in which considerable more focus for generation and T&D were booked.
EY’s analysis of the market situation in Europe suggests that the market is transforming, prompting many companies to use strategic deal-making to transition to new business models and explore new opportunities, such as energy services and customer solutions. Q4 of 2015, in particular, saw strategic buyers, predominantly from Germany, Italy, Spain and the UK, snap up renewables to offset unfavourable conditions surrounding thermal power as power price plummeted, as well as the long term negative outlook for carbon pollutants such as coal and gas. Additional trends include the bolt-on of technology companies, particularly in energy storage solutions, as well as overseas investment opportunities in emerging markets. Furthermore, unexpected and rapid policy changes, as occurred in the UK surrounding renewable subsidies, is creating uncertainty within the local market in terms of future investments in renewables.
The consultancy notes a number of trends that will come to affect European P&U M&A activity across 2016. One major trend is that integrated utilities will shed low growth assets on the back of continued low wholesale energy prices as economic growth and power consumption is further decoupled in Europe. The consequences are that growth in distributed energy, energy efficiency measures and deployment of battery storage devices, are likely to result in further write-downs of thermal capacity and continued divestment of low-growth assets. A further trend may see utilities begin to work more closely across industry borders, joining forces with financial and technology firms to capitalize on synergies and shared expertise.
Additionally, further overseas M&A activity may be created as companies seek higher growth assets in foreign markets. Finally, regulated and renewable assets may continue to exchange hands, with financial investors emerging as key buyers.