Robust outlook for 2013 power and utility deals after a decline in 2012
- Deal values down 16.8% compared to 2011 on the back of global economic uncertainty and continued low natural gas prices
- Financial buyers eyeing up secure and predictable cash flows
- Robust transactions environment predicted for 2013
London, 31 January 2013. Mergers and acquisitions (M&A) values within the power and utility (P&U) sector during 2012 declined by 16.8% (US$120.4b, compared with US$144.7b in 2011), according to Ernst & Young’s quarterly Power Transactions and Trends report. The report highlights that the weak macro environment prompted buyers to focus on lower-risk transactions and internal cost reduction programs.
The average deal value for 2012 remained in line with 2011 at US$552m, with eight transactions worth over US$1b taking place in Q2 2012 alone. However, the second half of 2012 depressed the average 2012 deal value, with a higher concentration of deals under US$100m reflecting the greater emphasis on smaller deals and an increase in renewable transactions.
Looking back on 2012, Joseph Fontana, Ernst & Young’s Global Transactions Power & Utilities Leader, says: “For global power and utilities, 2012 was a year of transformation in the deal-making environment. Decade-low natural gas prices in North America, aggressive European environmental regulations, continued Eurozone economic uncertainty and over-leveraged balance sheets at some of the larger European players all contributed to a tougher landscape.”
Edgars Ragels, Ernst & Young Transaction Advisory Services Group Leader for Fuel, Energy and Power Companies in the CIS adds: “2012 wasn’t an easy year for Russian power companies: the low level of profit from electricity and power sales, the economically unsound heating rates and higher gas prices all make the sector less attractive for investors. If we look at key trends in the Russian M&A market in 2012, we can say that state companies captured a greater share of the power generation market by acquiring generation assets, oil and gas companies actively diversified to include generation assets, major Russian power producers expanded into emerging markets and investments were made in alternative energy on foreign markets. These trends should continue in 2013, and the number and size of transactions should rise.”
Financial buyers turn aggressive
Financial deal activity from private equity, infrastructure funds and sovereign buyers reached a two-year high in 2012, with deal value rising to US$37.9b compared with US$22.5b in 2011, and contributing 31% to total 2012 deal value. There was a continued desire to acquire quality assets with predictable cash flow such as regulated operations and long-term contracted power plants.
2012 also saw European utilities looking to generate capital through divestments, prompting financial buyers to view it as the right time to build up their regulated asset portfolio. However, the second half of the year remained light on financial activity, with deal values declining 74% in H2 2012 compared with H1 2012; driven by the delays in European utilities’ divestments plans and privatization programs, which kept investors on the sidelines.
Specific country and regional trends drove transaction activity in 2012
In the Americas, the total deal value and volume declined 58.2% and 16.2% respectively, compared with 2011. Depressed natural gas prices prompted some market players to hold on to generation assets, however falling margins pushed several hybrid utilities to reduce their portfolio of competitive generation in favor of redeploying capital into their regulated business.
Joseph Rodriquez, Ernst & Young Global Power & Utilities Sector Resident, says: “As a consequence of the depressed natural gas prices, the US became one of the most active countries for generation deals during 2012, with financial players emerging as the most logical buyers of these assets. Elsewhere in the Americas, Brazil continued to entice foreign investors due to strong economic growth and significant energy infrastructure investment needs and in 2012, hosting 12 deals with a cumulative value of US$8b.”
Looking ahead in 2013, it is anticipated that deal activity in the Americas will be fuelled by US-based hybrid utilities exiting competitive generation assets and heightened investor interest in Latin America. There is also the potential for billion-dollar mergers in the US as utilities seek to rebalance their portfolios and get the right mix of regulated and unregulated operations.
Europe contributed close to 50% of total global deal volume and value in 2012. Divestment and privatization programs in Europe emerged as the strongest contributor to 2012 deal activity, accounting for nearly 20% of European activity as a number of utilities divested non-core assets to strengthen core businesses and expand in emerging markets. The region also continued to be the focus for renewable energy transactions, with wind the most active segment. While subsidy cut announcements curtailed some activity, momentum was maintained as utilities struggled to balance capital allocation and portfolio management while complying with aggressive environmental mandates.
In 2013, billion-dollar deals are anticipated to come out of European utility divestment programs, particularly on the regulated side, where there is strong buyer interest. Europe will also see a focus on renewables in 2013; however, there may be the continuing challenge in 2013 to get certain over-leveraged renewable projects into credit-rated financial packages.
Within Asia-Pacific, large-value transactions in China and Australia increased the 2012 deal value to US$30.1b compared with US$11.3b in 2011. In other emerging markets, including South Asia – Malaysia, Thailand and Indonesia, the need to meet energy demand shifted M&A focus to securing fuel supplies. In terms of outbound M&A activity, Europe remained the favorite destination for Asian investors, driven by favorable regulatory policies and availability of high-quality assets.
In 2013, growing fuel security issues, especially in countries such as India, Japan and China, are likely to make backward integration to secure the fuel supply more pronounced in Asia Pacific, with utilities acquiring coal mines and gas assets in both domestic and global markets.
2013 promises to be more robust
Despite the challenges of a weak global economy, a robust transaction environment is anticipated in 2013, with investors favoring the yield of regulated assets over the volatility of other sectors and artificially low government bond yields.
Rodriquez comments: “The ingredients are in place for a steady deal-making environment in 2013. Access to credit remains relatively strong, and there is a war chest of sovereign wealth capital ready to be put to work. The valuation gap between buyers and sellers that held up some deals in 2012 will narrow as sellers act on investor pressure to redeploy capital.”
Fontana summarizes: “As global power and utility companies continue to operate in a fluid market, transaction opportunities will naturally follow. Whether the aim is to rebalance the mix of competitive and regulated businesses, reduce debt, focus core operations, or free up capital to invest in emerging markets, there will be robust activity in 2013.”
To download the report, visit www.ey.com/GL/en/Industries/Power---Utilities
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