Confidence, deal activity improving in power and utilities sector

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Thursday, 5 December 2013 - Transaction volumes and confidence are up in the global power and utilities sector and a further uptick in deal activity is expected both locally and globally in 2014, according to EY.

EY’s Global Capital Confidence Barometer: Power & Utilities report, released this week, shows nearly a third (28%) of the 203 respondents in the sector globally intend to pursue an acquisition in the next 12 months – a three-fold increase on 18 months ago.

EY Oceania Power & Utilities Leader Matt Rennie says the value of M&A in the sector in Australia reached almost $900m in the last quarter (Q3 2013) and will increase over the next 12-36 months as a consequence of expected NSW, Queensland and Western Australia reforms.

“Confidence has improved and growth remains a key focus for power and utilities executives globally, with 50% indicating growth is their number one focus,” he says.

“In Australia, the dominant driver of transactions will continue to be the reform program of state governments, both in the sale of government owned generators and in facilitating greater private sector involvement in government owned network sectors,” he says.

Earnings pressure may lead to more ‘gentailing’

The Barometer found confidence in corporate earnings among survey respondents has dropped, from 45% six months ago down to 38% now.

“Australia is no different – utilities here are facing real pressure. There is demand uncertainty as a consequence of residential solar take-up and longer term industrial usage, combined with state government reforms and transformation agendas,” says Rennie.

“Unprecedented customer sensitivity to price has changed the power game and utilities across the supply chain are struggling to rebalance.”

“As a result, generation businesses are focusing on cost control and may be looking at acquisitions elsewhere in the electricity supply chain, including ‘gentailing’ models.”

Re-evaluation of traditional business model drives growth focus

Rennie says changing political, regulatory and commodity fundamentals will see utilities continue to re-evaluate traditional models, narrow their focus on core operations, and optimise asset portfolios through non-core divestments and acquisitions of supporting vertical and horizontal businesses.

“As a result we expect to see optimisation of organic platforms, driven by the emergence of new technologies and a re-evaluation of the traditional utilities business model,” says Rennie.

“In Australia, this means that utilities are looking to fundamentally alter their operating and service models, to operate smarter, not simply cheaper.”

“This requires considerable effort and in some cases expense, and may lead to divestments of non-core and incremental operations. The challenge is to ensure that regulatory frameworks encourage, not penalize, utilities embarking on this journey.”

Key findings of Global Capital Confidence Barometer: Power & Utilities:

  • 67% believe the global economy is improving, compared with 47% six months ago
  • 93% consider credit either stable or improving, the highest level in two years
  • Brazil, India, Canada, South Africa and Chile are the top five investment destinations for power and utilities companies globally
  • 28% intend to pursue an acquisition in the next 12 months, up from 23% six months ago and 13% just 18 months ago
  • 69% expect global deal volumes to improve in the next 12 months

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This news release has been issued by Ernst & Young Australia, a member firm of Ernst & Young Global Limited.

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Megan Ball
Ernst & Young Australia
+612 8295 6427