Power and utility deal volume reaches three-year high, with deal values hitting US$125.4b in 2013
London, 27 February 2014
Global power and utility (P&U) transaction activity shows signs of recovery with deal volumes reaching a three-year high of 398 total deals in 2013, with a value of US$125.4b, according to EY’s quarterly Power transactions and trends report released today. These numbers represent growth of 30.1% in deal volumes and 4.1% in deal value respectively, compared to 2012.
- Deal volume for 2013 up 30.1% and deal value up 4.1% on 2012
- Three key trends predicted to drive deal activity in 2014: industry consolidation, market reforms and emerging markets
Matthew Rennie, EY Global Transactions Power & Utilities Leader, says:
“Overwhelmingly, rebalancing and consolidation drove transaction activity during 2013. Looking ahead to 2014, the C-suite is showing a renewed interest in upstream and downstream acquisitions and a focus on innovation.
“In an environment of wholesale price pressure in Europe and the United States, utilities are indicating they are keen to pursue cross-border transactions, where synergies can be exploited and returns can be increased through diversification.”
Three drivers emerged in Q3 and Q4, and these are expected to drive activity in 2014: industry consolidation, market reforms and continued opportunities in developing countries. Despite the impact of broad macro themes, today’s transaction drivers are localized, reflecting varying regulatory and business transformation within each region.
Sustained pressure on utility balance sheets to continue to drive M&A activity globally
European utilities sustained their focus on fortifying balance sheets during 2013, restructuring their asset portfolios by announcing a number of asset disposals throughout the year; with cumulative asset divestments of around US$30b and a 19% increase in deal volume. 2013 also saw a notable rise in activity by financial investors in Europe, with deal volume by financial investors increasing by more than 27%. This can be largely attributed to heightened interest in regulated electricity transmission and distribution (T&D) and water assets shown by financial investors globally.
In the US, low wholesale prices, stringent environmental regulations and portfolio optimization by hybrid utilities dominated deals throughout 2013. In 2014, as several US utilities look to reduce their exposure to unregulated assets, financial investors are likely to emerge as natural buyers, which they are likely to hold on to in anticipation of a rise in natural gas prices. Deal activity in the wider Americas region increased by 36% over the year; with continued interest from European investors looking to diversify in the growing markets of Latin America driving deal volumes in the region up by over 45%.
Asia-Pacific saw significant activity with a 43% increase in deal activity and 15% increase in deal value. China dominated the transaction markets, leading both domestic and cross-border deals in the region. Domestic consolidation, particularly in the gas T&D market, produced several megadeals in the region and domestic deals in the country accounted for over US$15b of deal value.
Regulatory and market reforms opens up transaction opportunities
Uncertainty in relation to the generation mix in Japan incentivized Japanese investors to pursue outbound investment in 2013 and attractive valuations and distressed assets have encouraged investors in both China and Japan to explore growth opportunities in developed markets. While China’s largest utility picked up stakes in electricity T&D assets in Australia, Japanese investors were active in Europe, acquiring key regulated assets in the region.
Rennie comments “While we expect privatization programs in Oceania and consolidation in China to continue to contribute to deal activity in the region, we are carefully watching the deregulation of the Japanese utility sector, which may set the scene for revitalized M&A activity in the near to medium term.”
Infrastructure build-out and capacity expansion driving emerging markets investment
With the transformation agenda a key discussion point in boardrooms, 2013 saw a growing number of utilities looking beyond their primary markets and expanding their global footprints, with utilities increasingly exploring organic and inorganic growth options in the emerging markets of Turkey, Brazil, South Africa and Central and Southeastern Europe.
Much of the capital raised from divestments and cost cutting has been diverted to the emerging markets of Latin America and Eastern Europe. Utilities are also increasingly extending their exposure to new areas such as energy efficiency and energy management services, to consolidate existing market shares and focus on new areas where higher returns can be achieved.
Rennie comments: “Capital mobility will be an essential driver of transactions during 2014 as companies looking to diversify away from markets with excess capacity and low returns shift their focus towards emerging and reforming markets. We expect Africa, Japan, the Gulf States and South America to be focus areas for cross-border investors.”
To download the report and historical data, visit: www.ey.com/PowerandUtilities
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About EY’s Global Power & Utilities Center
In a world of uncertainty, changing regulatory frameworks and environmental challenges, utility companies need to maintain a secure and reliable supply, while anticipating change and reacting to it quickly. EY’s Global Power & Utilities Center brings together a worldwide team of professionals to help you succeed — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant sector issues. Ultimately it enables us to help you meet your goals and compete more effectively.