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Strong dealmaking expected to continue

Global Capital Confidence Barometer | Power and Utilities | 16th edition

M&A appetite rebounds with renewed economic confidence

Our 16th Capital Confidence Barometer reveals an improving appetite for dealmaking among power and utilities (P&U) executives. Renewed confidence in the global economic outlook is set to drive increases in M&A activity during 2017.

Disruption is an emerging force for change in the P&U sector. The impact of digital technologies, such as analytics, blockchain, artificial intelligence and robotic process automation on utility business models continues to dominate boardroom discussions, and executives expect these trends to influence growth — both organic and inorganic.

Macroeconomic environment

Confidence in the macroeconomic environment has increased, with 60% of P&U respondents seeing the global economy improving, compared with 20% six months ago. Almost all (99%) of respondents indicated confidence in corporate earnings growing or remaining the same, with the majority (54%) confident of earnings growth. There is also a view among those surveyed that equity valuations and the stock market outlook will remain positive.

Despite an improved macroeconomic outlook, concerns remain around global volatility and increasing government intervention. These issues have impacted short-term market stability and will have implications for M&A across all regions.

Economic confidence improves

P&U executives are optimistic that the global economy is getting stronger.

Q: What is your perspective of the state of the global economy today?

EY - What is your perspective of the state of the global economy today?

Policy and currency uncertainty poses the greatest risk

High levels of market volatility and increased government intervention remain major impediments to P&U growth. The sector is particularly vulnerable to these risks due to the high degree of political influence around investment in critical infrastructure, regulation and pricing.

This issue is explored in a blog by Matt Rennie.

Q: What do you believe to be the greatest economic risk(s) to your core business during the next 6–12 months?

EY - Q: What do you believe to be the greatest economic risk(s) to your core  business during the next 6–12 months?

Corporate strategy

Growth is at the forefront of the P&U agenda, with global transactions driving both organic and inorganic expansion. Digital transformation is the focus of many deals. Many utilities are reviewing their portfolios with an eye to embracing innovation and investing in new products or services, particularly across sectors.

Utilities explore options for growth and target deals focused on innovation

While the improving global economy will boost organic growth in the next 12 months, P&U executives are seeking M&A, JVs and alliances to increase inorganic growth. As companies review their portfolios, many are pursuing acquisitions as the most effective way to access new products or innovation.

Q: From where do you see growth within your company coming during the next 12 months?

EY - Q: From where do you see  growth within your company coming during the next 12 months?

Q: What are your main strategic drivers for pursuing an acquisition: JV or alliance outside your own sector?

EY - What are your main strategic drivers for pursuing an acquisition:  JV or alliance outside your own sector?

Digital transformation will shape future utility growth

Digital transformation is critical if utilities are to remain relevant in the new energy market. P&U executives report this as the single biggest boardroom issue driving the growth agenda.

Q: Which of the following will be most prominent in your boardroom thinking during the next six months?

EY - Q: Which of the following will be most prominent  in your boardroom thinking during the next six months?

Q: In the search for growth, what is the most important question business leaders need to find answers to in today’s business environment?

EY - In the search for growth, what is the most important question business leaders need to find answers to in today’s business environment?

Disruptive forces drive frequent portfolio review

Utilities are constantly reviewing their portfolios to seize opportunities or take action against risks.

Q: Have you increased the frequency of your portfolio review process to capitalize on disruptive forces in your sector?

EY - Q: Have you increased the frequency of your  portfolio review process to capitalize on disruptive forces in your sector?

M&A outlook

There are signs that M&A activity in 2017 will be very strong, with Q1 deal value reaching US$45.5b, a 30% decrease quarter on quarter, but still a good result for a normally slow quarter of the year. Sixty percent of CCB respondents believe the market will be stable this year, and an additional 37% are forecasting improvements over a (very robust) 2016. Ninety-four percent of respondents expect deal completion to improve during the next year.

Dealmaking momentum to increase

Confidence among P&U executives is at an all-time high, with the strongest April result for our survey since before the global financial crisis.

Q: Do you expect your company to pursue M&A actively in the next 12 months?

EY - Q: Do you expect your  company to pursue M&A actively in the next 12 months?

Pursuit for growth to drive cross-border dealmaking

Utilities remain hungry for growth in both market share and new geographies. As outlined in Power transactions and trends, in Q1 2017, cross-border deal flow accounted for 45% of deal volume and 84% of deal value.

Q: What are the main strategic drivers for pursuing acquisitions?

EY - Q: What are the main  strategic drivers for pursuing acquisitions?

Q: What will be the main themes of M&A in the next 12 months?

EY - Q: What will be the main themes of M&A in the next 12 months?

Top M&A destinations

North America and Europe are the top destinations for P&U investment. Despite uncertainty around some federal government policy changes, the US remains a hot spot due to a strong economic outlook.

EY - Top M&A destinations