First quarter Power and Utilities deal value reaches three-year high
London, 5 May 2014
2014 started promisingly for the Power & Utilities (P&U) sector, with deal value (US$28.2b) being the highest first-quarter result since Q1 2011, according to EY’s quarterly Power transactions and trends report, released today.
- Overall Q1 deal value reaches US$28.2b, up 11% on 2013, and up 8% on 2012
- Financial investor deal value doubled (US$14.3b) compared with Q4 2013
- Emerging markets continue to receive significant capital inflows
- Divestments predicted in 2014 as traditional business models continue to be challenged by falling demand and decentralized energy
Matt Rennie, EY’s Global Transactions Power & Utilities Leader comments:
“Q1 2014 provided the highest first-quarter deal values in three years. With the exception of 2011, after Q1, deal value in the sector has always risen; and based on the upcoming deals and current trends, it is highly likely deal activity will increase in the coming quarters. This healthy outlook reflects our latest Power & Utilities Capital confidence barometer (CCB), which reveals continued optimism in the global economy, with 61% of global P&U executives seeing an improvement in conditions.”
Financial investors dominate M&A in Europe as they diversify into infrastructure
While overall deal value for the quarter was down on Q4 2013, financial investor deal value doubled, reaching US$14.3b, with an average deal size of US$950m. This is the highest level for three years, reflecting strong confidence in utility assets, and this momentum is expected to continue as infrastructure and pension funds look to diversify investment portfolios with renewable energy, pipelines, utilities and transportation assets.
The quarter also saw a significant rise in financial buyer activity in Western Europe, driven by regulatory and economic uncertainty, the prolonged energy crisis and natural gas supply concerns. Major utilities across the region are transforming themselves into providers of energy services. While some are retrenching, cutting costs and divesting assets; others are diversifying into new, more profitable international markets and this is expected to continue.
Mixed fortunes across the global P&U market
In the Americas, deal activity in North America remained buoyant at US$3.5b for the quarter, however this is lower than previous first quarters, primarily due to an absence of any megadeals. In Latin America, deal activity was extremely strong, at US$3.1b for the quarter, with Brazil dominating deal volume with seven of the nine deals in the region and accounting for 50% of the deal value.
Deal activity in the Asia Pacific region halved in Q1 2014 compared with Q4 2013, as megadeals remained absent from the region. Renewables deals formed the bulk of the activity in the region, contributing US$2.8b (63%) of total regional deal activity. China registered the largest number of deals, hosting seven deals worth US$2.1b, spurred by an increasing push toward clean energy sources in the country, which drove investor confidence higher.
Emerging economies remain core to P&U growth strategies
Emerging markets continue to receive significant capital inflows from Western Europe and other developed nations, where utilities continue to face slow growth or negative price trends. China, the US, India, Brazil and Singapore are P&U companies’ top five investment destinations, and 72% of those surveyed for the CCB indicated that they intend to deploy acquisition capital into the emerging markets. This movement is boosted by governments keen for capital, with countries such as India and Brazil taking steps to introduce regulatory reforms to create an attractive environment for foreign and private investment.
Looking ahead, disruption is expected to be a key driver for deals
When looking ahead to what will impact acquisition and divestment strategies for the remainder of 2014, the key factors include shale gas; declining energy demand in the US; distributed energy, market uncertainty and generation mix challenges in Europe; infrastructure build-out in Africa; and consolidation and privatization in Asia Pacific.
Rennie comments “These factors are changing the market, and utilities are scrambling to realign their strategies. Disruption, digital, and utility transformation will dominate deal activity in coming years. As the P&U sector transforms into a customer- ordinated, distributed and technologically driven industry, network companies are starting to feel the pressure.
These companies, which have traditionally operated in the absence of competition, need to quickly identify and re-establish their place. This involves an acceptance of the reality of large scale long term distributed generation, and continued falling demand on the shared network, into core business strategies.
“These are exciting times. This is a time of significant change as traditional utilities struggle to find a core area of strength from which to maximize returns.”
Notes to editors
About Power Transactions and Trends data
The analysis and perspectives in Power transactions and trends are based on global financial releases and Mergermarket data, as well as global engagements conducted by EY member firms from 2012 to 2014.
“Power and utilities” covers electricity generation, networks and retail, gas networks and retail, water wholesale, networks and retail organizations, and renewable energy companies. Deal activity and valuations may fluctuate slightly based on the final date of data collection and analysis by EY.
About EY’s Capital Confidence Barometer
The EY Capital confidence barometer is a survey of 1600 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 tenth bi-annual Barometer in the series, which began in November 2009.
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.
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