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Cautious optimism guiding transactions in 2012

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Our latest Global Capital Confidence Barometer survey shows confidence returning to the power and utilities sector. M&A activity is limited, divestments are up, and the second half of the year promises opportunities for companies that act now. Joseph Rodriquez reports.

Optimism returning

The power and utilities sector is seeing rapid and dramatic change. Environmental regulation, sovereign instability in Europe, government austerity programs, massive future capital expenditure and the lowest natural gas prices in North America for a decade are creating market volatility and changing how companies compete.

Despite this, our latest Global Capital Confidence Barometer shows optimism returning to the sector. This renewed confidence, driven by a recovery in global equity prices, liquidity injections from central banks and good corporate earnings, has 87% of 189 respondents saying the global economy is stable or improving.

This is a marked improvement on the 63% who responded to the same question in a previous survey.

Additionally, 93% of P&Us describe local markets as stable or improving, compared with 85% six months ago. 58% of US respondents say this, compared with just 17% six months ago.

In contrast, emerging markets, while still outpacing developed counterparts, are seeing growth slow. In China, only 10% see the local market as improving, compared with 27% in October 2011.

Sentiment in India has remained consistent over the last six months.

Divestments high on the agenda

Despite increased confidence, P&Us maintain a cautious outlook, seen in a much-reduced appetite for M&A. They may still have an eye on growth, but 55% of respondents say that, given any excess cash, organic growth is their focus, compared to 12% who will focus on M&A.

Only 14% were planning an acquisition in the next 12 months, the lowest level since our survey began in 2009.

On the other hand, 61% of respondents cite divestment as a key objective, due mostly to a focus on core assets. In Europe, divestments are being driven by the need to reduce costs and free up capital for investment in growing economies, and focus on core operations.

Debt-burdened countries like Greece, Italy, Portugal, Spain and Ireland are privatizing assets, as are several large European P&Us facing increasing pressure as domestic markets shrink and credit agencies downgrade ratings.

In the US, we expect P&Us to start divesting noncore assets to focus on core operations and make opportunistic acquisitions.

Almost 70% of P&U executives in Brazil are planning an asset sale/divestment in the next 12 months, more than double the global response rate. This reflects its massive need for generation build-out and an adequate energy infrastructure ahead of the Olympics and World Cup, and fierce competition for government funding.

With high levels of divestment and limited enthusiasm for acquisition, we expect conditions are right for many buyers from outside the sector, including infrastructure funds, sovereign funds, private equity firms and other financial buyers.

Investors may look for higher returns

Despite uncertain economic conditions, most investors see rate-regulated utilities as a safe haven, because stocks tend to perform well in tough times, particularly in low-interest-rate environments.

However, as the economy improves, investors will accept more risk in search of higher returns, bringing money both into the sector, and to investment opportunities outside it. As this happens, P&U share prices may drag the broader market down, which could put pressure on credit ratings and access to finance.

Opportunities now

While cautiousness currently favors organic growth, we expect M&A activity to pick up in the second half of the year. Opportunities will arise from European divestment programs and a desire to gain a larger share of Latin American and Asia-Pacific higher growth markets.

In the meantime, smart companies see current conditions as an opportunity to improve operational fitness, reduce costs, deleverage from low-growth economies and divest noncore assets.

Companies with streamlined operations, a clear future investment strategy and robust risk evaluation and management processes will be best positioned to capitalize on future opportunities.


For more information

Global Capital Confidence Barometer surveyRead the latest Global Capital Confidence Barometer survey.

About our 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. Our panel is made up of 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 P&U executives (53% from the C-suite)
  • P&U companies from 33 countries including China, the US, Australia, the UK, Canada, Brazil, India and Russia
  • 22% of P&U respondents have revenue of US$5b or more


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Contact us



Joseph Rodriquez
Global Power & Utilities Sector Resident
Transaction Advisory Services
New York, US
+1 212 773 7105
joseph.rodriquez@ey.com

Joseph Rodriquez

Joseph is Global Power & Utilities Sector Resident for Transaction Advisory Services and has managed numerous transactions for private equity, corporate investors and sovereign wealth funds. This has included financial analysis and due diligence (both buy-side and sell-side), deal negotiation, analysis of financial forecasts, working capital requirements, analysis of free cash flow and synergy assessment.

Joseph has worked with various power and utilities, including electric and gas utilities, independent power producers, retail, renewables and demand response.

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