Transaction trends in 2013
Regional issues are likely to set the agenda in what promises to be a transformative year for transactions in the power and utilities (P&U) sector. Joseph Rodriquez reports.
Robust but tough 2012
As our latest P&U transactions and trends report shows, 2012 saw robust transaction activity, with conditions largely dictated by:
- North America’s low natural gas prices
- Europe’s increasingly strong environmental regulations
- Eurozone economic uncertainty
- Over-leveraged balance sheets at some of the larger European players
Transaction activity fell below 2011 levels, with total transaction value reaching US$120.4b (2011: US$144.7b) and deal volume registering 306 (2011: 359).
While the year began with some big-ticket deals, the second half was tighter, underpinned by continued global economic weakness and a number of regional issues.
Regional issues driving trends
Despite the impact of these broad macro themes, transaction drivers are increasingly localized, reflecting varying regulation and evolution within each region. Highlights of some key regions include:
What to watch
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Domestic deals still dominate, with most cross-border deals done by larger utilities and financial buyers looking to draw synergies through optimizing global asset portfolios and diversifying their footprint into growth markets.
New buyers bring new direction
The rise of non-traditional buyers is a continuing trend for 2013 and beyond. Private equity, infrastructure and pension funds have recently made significant transactions – headlined by E.ON’s US$3.7b sale of Open Grid Europe.
These buyers are attracted by the predictable cash flows and earnings of regulated assets. Some buyers, such as those from Asia and the Middle East, are keen to secure fuel supplies and broaden their footprint.
Innovative projects and non-traditional investors will become the norm in 2013 and beyond. Demand-side management and energy efficiency continued to develop in 2012, and we predict 2013 will see a significant step-up. It is not feasible to keep pouring capital into more resources on the supply side: the sector needs to invest further in efficiency, and this will undoubtedly influence deals.
Positive outlook for 2013
Whether the aim is to reduce debt, focus core operations or free up capital to invest in emerging markets, there will be robust activity in 2013. Access to credit remains relatively strong, with a war chest of sovereign wealth capital ready to be put to work.
The valuation gap that held up some deals in 2012 will narrow as sellers act on investor pressure to redeploy capital. Utilities that take the time with due diligence and gathering market intelligence will maximize value and ensure their best chances of success.
How we can help
Doing the right deal in the right way can make a P&U business more competitive and profitable. Our Transactions Advisory Services professionals advise and support clients through the life cycle of a transaction, from early stage to execution and post-deal activities. Whether buying or selling, our proven practices and consistent methodologies can help achieve successful outcomes.
Veolia’s formula for transaction success
Last year was pivotal for water and waste management multinational Veolia, which embarked on a €5b (US$6.46b) asset divestment program.
Speaking to Ernst & Young, Hubert Sueur, Director of Investments, M&A and Equity Financing, said that robust preparation, an experienced team, a clear strategy and excellent timing were key to the program’s success.
Sueur said Veolia recognized the attraction of its “quality assets” so, it avoided bilateral discussions with any potential buyers to maximize value: “We told everyone: ‘There’s a process, and we’re happy for you to participate’. A competitive process is the best way to achieve a good market price.”
Sueur said Veolia’s divestment program will run until the end of 2013 with the aim of reducing net debt to €12b (US$15.5b). He added that any future growth capex activity will have to meet “very strict” profitability guidelines and that Veolia is not looking at external growth through acquisitions right now. “We keep the radar on, but we are not active.”