Power and utilities M&A outlook down and appetite for divestment up
London, 29 May 2012 - Persistent market volatility, austerity measures, Eurozone uncertainty and potential for slowing growth in emerging markets have continued to dampen the acquisition appetite for power and utility companies, according to Ernst & Young’s latest Capital Confidence Barometer, based on interviews with 189 power and utilities senior executives in 33 countries.
Only 14% of power and utility respondents anticipate pursuing an acquisition in the next 12 months and with all the divestment and limited enthusiasm for acquisitions, it is expected that many buyers will come from outside the core power and utility sector. Buyers are likely to include infrastructure funds, sovereign funds, private equity firms and other financial buyers.
However, there is positive news in certain markets with the number of domestic respondents who believe the US economy is improving more than tripling; with 58% of US power and utilities executives viewing an improving local economy compared with just 17% six months ago. The increase in US local economic confidence reflects improving credit markets, stronger consumer confidence and a falling unemployment rate.
Joseph Fontana, Ernst & Young Global Power & Utilities Transaction Leader comments, “The recovery in global equity prices, liquidity injections by central banks and corporate earnings have all supported this increase in optimism, and power and utility companies are generally optimistic about their local markets.”
By contrast, positive sentiment is declining for China, with 10% viewing the local market as improving, compared with 27% in October 2011. Yet, despite the fall in confidence, 90% of power and utility respondents still view China as stable, up from 73% six months ago.
Divestment now a core strategy
However, accessing capital is proving to be restrictive and, as a result, appetite for divestment is up. Transaction activity is likely to be prevalent, with markets such as Brazil reporting that nearly 70% of power and utility executives are planning to make an asset divestment in the next year. This is more than double the global power and utility response rate, and reflects the massive generation build-out required to support the growing domestic economy.
As Brazil grapples with the extraordinary investment required, this demand is likely to result in increased M&A activity in the region as small and mid-tier power and utility companies dispose of assets to free up capital. With excess cash or access to global capital markets it is predicted that foreign sovereign funds, particularly from Asia, along with European utilities looking to deleverage from slow domestic markets, are likely to be the buyers of these assets.
Globally, the main driver of power and utility companies’ divestment plans is a focus on core assets, with 61% citing this as their key objective. Reflective of low domestic growth in continental Europe, companies listed raising cash to compensate for underperforming businesses as a key driver of planned divestment. Within the US it is anticipated that there will be divesting of noncore assets to focus on emission reduction and energy savings, driven by stricter emission rules. In Q1 2012, close to 40% of the total US deals were either related to renewable power generation or energy management services.
Appetite for acquisitions declines; however, buyers may be outside the sector
The global M&A market for power and utilities companies continues to be restrained, despite increasing confidence in local and global markets. While fiscal tightening by European banks might restrict future M&A activity, the growing number of asset disposal programs by European utilities and the European governments’ privatization programs are expected to drive deal flow in the short term with foreign sovereign buyers especially active in this space.
Higher growth markets in Asia-Pacific and Latin America continue to be the most preferred investment destinations for power and utility companies globally. Despite the improved deal making environment, power and utility executives remain cautious about M&A, with a heavy preference on organic growth. The Q1 and Q2 2012 earnings season is presenting itself to be a key determinate of how aggressive companies may be in the growth targets and pent-up demand for growth will likely see a rush for quality assets fuelling M&A activity in the second half of 2012
Fontana summarizes, “Despite a slow start to the year from a transaction perspective, we anticipate robust deal activity in Europe and Latin America, as well as continued opportunistic generation acquisitions in the US to drive an increase in M&A activity in the remainder of 2012.”
For more information and to download a copy of the Global Capital Confidence Barometer Power & Utilities report, visit the Ernst & Young Power & Utilities website.
Notes to editors
About the survey
The Ernst & Young Capital Confidence Barometer is a survey of over 1000 senior executives from large companies around the world and across industry sectors. The objective of the Barometer is to gauge corporate confidence in the economic outlook, to understand boardroom priorities in the next 12 months, and to identify the emerging capital practices that will distinguish those companies that will build competitive advantage as the global economy continues to evolve. This is the sixth half-yearly Barometer in the series, which began in November 2009.
About Ernst & Young’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. Ernst & Young's Global Power & Utilities Center brings together a worldwide team of professionals to help you achieve your potential — 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. It’s how Ernst & Young makes a difference.
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