EY: M&A in Power & Utilities reaches 177 billion

12 March 2015 Consultancy.uk

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.

Global P&U deal value and volume

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.

Renewable sector
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.

Renewables deal value by geography

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.”

Global P&U deal value - by segment

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.

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.