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Capital Confidence Barometer

Power & Utilities, April-October 2013

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Global economic confidence returns, but power and utility executives remain cautious — leaving good opportunities for first movers

Key findings

  • Confidence returns: 89% of P&U executives think the global economy is either improving or stable, up from 75% six months ago.
  • Better credit availability: 52% of P&U executives believe credit availability is improving, compared with just 32% in April.
  • Cash heads toward growth: 50% of P&U executives are focused on growth, the highest in two years, and 61% of respondents with excess cash are pursuing growth.
  • Rising valuations: 46% expect valuations to increase in the next 12 months.
  • Time to act: desire to transact remains flat for now, leaving a window of opportunity before valuations start climbing.

Our eighth biannual Capital Confidence Barometer shows a marked increase in global economic confidence across all leading indicators. But confidence has yet to translate into action.

Expectations among power and utility (P&U) executives for global economic growth, corporate earnings and credit availability are at their highest levels in the last two years.

This should translate into a robust M&A and capital investment environment. However, deal appetite remains low for P&U executives.

What’s the reason for this waiting game? It’s not valuations. In fact, 46% of P&U executives expect valuations to rise over the next 12 months. Only 5% think they will decline. Buyers should consider taking advantage of this inflection point now.

We believe the disconnect between renewed confidence and M&A activity can be attributed to two distinct reasons:

  • The concern that global economic growth has been uneven and heavily supported by monetary policy, which has P&U executives trying not to get ahead of the recovery.
  • Financial buyers have re-entered the fray for P&U assets. They are pursuing assets at attractive valuations more aggressively. Financial-buyer activity has accelerated, and we believe that will continue for the foreseeable future.

For now, portfolio management continues as the strongest theme. Globally, utilities continue to reshape their asset portfolios, whether to deleverage from commodity volatility or to gain a footprint in high-growth markets.

We anticipate a robust M&A climate in 2013 that outpaces 2012. The question is: who will lead and who will follow?

Viewpoint: China to fill the void left by European utilities

As European capital heads for Latin America and higher-growth opportunities within Europe, who will fill the investment gap in mature markets like the UK and Germany?

We believe China will. From 2008 to 2012, outbound P&U investment by Chinese companies totaled US$37.9b, with a compound annual growth rate of 26%. Europe was the target of this investment, accounting for over 70%, with regulated transmission and distribution (T&D), water, and renewables the sectors of choice.

With the plethora of European divestment and privatization programs either underway or slated, we expect the Chinese to be particularly active in replacing the European capital heading for emerging markets, such as Latin America.

This change of players should work well, as European utilities need to take on riskier assets and projects to deliver growth for shareholders. Conversely, Chinese capital is happy to sit on steady, albeit low, returns for decades.