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Capital Confidence Barometer: power and utilities - EY - Global

Capital Confidence Barometer: Power & Utilities, April 2012 - August 2012

Divestment on the agenda

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Top 3 key findings:

  • 87% view the global economy as stable or improving
  • 33% of companies are planning to divest assets in the next year
  • Appetite for acquisition is down and focus on core assets and cost reductions are more prevalent than ever

Our sixth Global Capital Confidence Barometer finds that despite a more favorable deal-making environment, leading power and utility companies are not yet sure about engaging in acquisitions.

However, appetite for divestments was particularly strong in some regional markets, with 69% of power and utility executives in Brazil, and 44% of US respondents planning a divestment in the next 12 months.

Pressure from environmental regulation, sovereign instability in Europe, government austerity programs and a decade of low natural gas prices in North America are affecting the sector. How companies position themselves now will shape their long-term future.

Despite this, power and utility companies are showing strong signs of optimism, with 87% viewing the global economy as stable or improving compared with 63% in October 2011. Over half see it as improving, compared with just 30% six months ago.

Agreement around the Greek debt rescue plan is providing some breathing space for global markets; with only 13% of current respondents being pessimistic, compared with. 37% in October 2011.

Why is the M&A appetite for power and utility companies falling in what is generally considered a favorable deal-making environment?

While power and utility executives are more confident, they are still fundamentally cautious. Market volatility, austerity measures, structural issues (mainly the Eurozone crisis) and potential for slowing growth in emerging markets have continued to dampen the appetite for acquisition.

Joseph Fontana
Joseph Fontana
Global Power & Utilities Transaction Leader

The current M&A landscape

Economic outlook

An inflection point for the sector
The global power and utilities sector is in a state of dramatic change, which is affecting how companies compete around the globe. North America is seeing what many believe is a long-term shift in’its natural gas market. Prices have dropped a staggering 86% from $13.31/mmBtu in July 2008, to $1.87/mmBtu on 18 April 2012 — the lowest in a decade.

Global economic outlook continues to improve
After significant global volatility in the second half of 2011, we are seeing a return to more stabilized markets.

Confidence

Confidence in local markets up
Power and utility companies are generally optimistic about local markets, with 93% citing a stable or improving local market compared with 85% six months ago.

Mergers & Acquisitions outlook

Divestment now a core strategy
With a view to streamlining and focusing on core business to enhance shareholder value, divestment of noncore assets continues to be a key part of global power and utilities’ strategic agendas. The percentage likely to sell assets has stayed at 33% over the last six months; however, this trend has been increasing since October 2010. We expect this to continue in the next 12 months as companies look to improve operational fitness.

Focusing on core assets
The main driver of power and utility companies’ divestment plans is a focus on core assets, with 61% saying this is their key objective.

Appetite for acquisitions declines, but buyers may be outside the sector
The global M&A market for power and utilities continues to be restrained. Despite citing increasing confidence in local and global markets, and a general improvement in access to credit, deal-makers are still cautious.

Access to capital

Credit conditions generally improving, but regional tightness remains
32% of power and utility respondents cited improving capital access, up an impressive 60% from 20% in October 2011. This is a positive sign for deal-making, and a reflection of better underlying economic conditions.

Balancing the capital structure
Liquidity among yield-focused investors has created favorable conditions for corporate debt markets. With interest rates at historic lows, companies are no longer only looking to reduce finance costs; because this has been largely achieved already. Instead, they are looking to achieve optimal capital structure by reducing cost of capital through rebalancing debt and equity levels.

Potential for a rotation of money
Despite suffering uncertain economic conditions, most rate-regulated utilities offer a predictable, lower risk- regulated return, making them attractive to investors seeking a safe haven. As a result, their stocks usually perform well, particularly in a low-interest-rate environment, as we have now.

Growth

Growth back at the forefront
After a sharp decline in October 2011, achieving growth is at the top of the agenda for nearly 50% of power and utility executives surveyed. This is encouraging, and reflects an underlying improvement in global economic confidence.

Organic growth preferable
The focus on growth by power and utilities is underpinned by a desire to achieve this organically rather than through M&A. 55% of respondents cited organic growth as their focus, given any excess cash, compared to 12% who say they will focus on M&A.

About this survey

The Global Capital Confidence Barometer is a regular survey of senior executives from large companies around the world, conducted by the Economist Intelligence Unit (EIU). Our panel is comprised of select EY clients and contacts, and regular EIU contributors. This snapshot of our findings gauges corporate confidence in the economic outlook, and identifies boardroom trends and practices in the way companies manage their capital agenda.

Profile of respondents

  • Panel of more than 1,500 executives surveyed in February and March 2012, including 189 power and utility executives (53% from the c-Suite)
  • Power and utility companies from 33 countries including China, the US, Australia, the UK, Canada, Brazil, India and Russia
  • 22% of power and utility respondents have revenue of US$5b or more

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Download the Capital Confidence Barometer PDF for the Power & Utilities sector

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