Disciplined approach to Australian deals
Transactions are on the rise in the Australian power and utilities sector. As Julie Hood explains, maximizing value from these complex deals requires a disciplined approach that considers a wide range of factors.
In 2014, the Australian power and utilities sector is a hub of transactional activity, driven by a convergence of factors:
- Market reforms
- Increasing regulatory burden
- Privatization programs of several state governments
In the wake of New South Wales’ sell-off of several large electricity assets — including AGL Energy’s AUD$1.7b purchase of the state’s largest power producer, Macquarie Generation — more states are considering doing the same. A wide range of keen global buyers are lining up as more assets come to market.
As our National Power and Utilities Sector Leader for Transactions, Julie is at the center of many of Australia’s “game changer” deals.
She and her team offer end-to-end support to both buyers and sellers, addressing all aspects of the sale, including:
- Operational stability
- Health and safety standards
- Cultural change
- Staff transitions
Are we clear?
Given today’s economic climate, maximizing value from these transactions is critical for both vendors and purchasers. Julie’s experience around the world has taught her that ensuring a deal realizes its potential value starts with being clear about the proposed sale.
“Today’s sophisticated buyers demand clear, robust historical financials as well as forecast data,” says Julie, “and adequate operational and commercial positioning information as they consider the strategic value a particular asset may add to their own portfolio.”
Providing this clear information can be challenging when a partial asset or service, rather than an entire business, is being sold and insufficient historical financial information exists.
“For example, an entity may include both a retail and a generation business and we need to separate the two for sale,” explains Julie. “They may be semi-autonomous within a larger entity, but there’s still a lot of work around splitting out the operations and all the financial information to give the buyer the comfort of having that data. Ensuring assets are attractive to buyers means providing clarity on what’s being sold.”
Don’t risk it
Another “must have” during a transaction is the ability to de-risk the process.
“Whether you’re selling or buying, risk can often be the underlying business decider,” she says. “If you’re the seller, you must maintain the underlying business performance of the retained assets and mitigate risks around that. If you’re the acquiring entity, you need to ensure that the underlying performance of your existing portfolio is not impaired and the portfolio devalued in the process.
“And if it’s a complex facility going through significant upgrades whilst you’re doing a transaction, this can be quite problematic. It’s about ensuring that the underlying business performance is well-controlled and that the transaction that sits above it is not going to impact or distract from that performance.
“If you’re dealing with a transition arrangement where buyers, for example, may continue to use the seller’s IT systems or maintenance staff for a period, these arrangements need to be defined and documented well — not just around the schedule of work but how they will be managed and costed, how performance is measured and how these services will be closed down after the deal is complete.”
Regulatory risk should also be considered within the context of the environment in which the transaction occurs.
Focus on the critical
As Julie and her team prepare clients for day-one readiness, she says the ability to prioritize is important.
“We might have a thousand things we would like to do,” she says, “but what we are really focused on is supporting clients to identify the tasks that are day-one critical, which may include approvals, change of ownership, and licenses.”
Everything that’s day-one critical is non-negotiable and must be monitored, “and everybody at the governance level, including the board and senior management, needs to be comfortable that these are all in place. Continuity of operations is pivotal.”
Other “nice to have” tasks, such as changing policies and procedures, can be actioned during the first 100 days post-transaction.
But the end of this 100-day period deserves more rigorous evaluation, says Julie. “You must absolutely come back and review the strategic purpose of acquiring this asset — has it been met? These transactions are not easy, so you’ve got to go in with your eyes wide open and at the end of that 100 days, ensure you’ve reaffirmed those assumptions. And you need to have a very clear plan of attack going forward.”
Julie believes other markets could learn from the way many of Australia’s biggest utilities transactions have been conducted. “The discipline that’s been applied to some of the major transactions in Australia can be used as great case studies for other transactions that are happening globally,” she says.
The whole package
The ability of Julie’s team to support clients through the life cycle of a transaction — and beyond — is important, because successful deals are about far more than negotiating the right sale price.
“We understand a transaction, not just around the corporate finance or financial due diligence side, but also around the operational transitions such as change management issues.”
“We will never know our clients’ businesses better than they do — nor should we — but we understand transactions and their environments and the associated challenges. This knowledge can be very valuable to clients as they position themselves for a successful transaction.”
For more information
Read more in our latest Power transactions and trends.