Our 17th Capital Confidence Barometer reveals a confident global power and utilities (P&U) sector, with dealmaking intentions remaining above long-term trends and driving strong expectations for growth.
The sector is boosted by better than expected economic activity in Europe, where P&U deal activity in Q3 increased 60% from Q2 to reach US$16.9b. This turnaround, as well as an outstanding quarter for the US sector and steady activity in China, means that all the major engines of global activity are now moving firmly upward. Continuing low interest rates are likely to encourage strong investment by industry players – though they may face more competition from private equity buyers and growing pressure by activist shareholders to deliver returns.
Macroeconomic environment and M&A outlook
P&U respondents are confident the economy is rebounding – and that the drivers are in place to make the most of better conditions. Of the respondents, 79% say the global economy is improving, compared with 60% six months ago, and almost all (99%) expect corporate earnings to improve or stay the same.
We also saw greater confidence around credit access and market stability that is expected to drive investments and dealmaking intentions. Six months ago, 34% of P&U executives expected the equity valuations/stock market outlook to improve – now more than half (55%) anticipate improvement in capital market conditions.
Private equity expected to play a bigger role in dealmaking
While we saw a slight drop in the number of respondents (51%) expecting to actively pursue a merger or acquisition in the next 12 months, dealmaking intentions remain above the long-term trend.
Private equity is likely to be the biggest story in P&U M&A over the next 12 months, with corporates facing more competition from these buyers than during the past five years. Deals in Q3 reflected this trend, particularly in the generation segment. The quarter’s second-biggest deal was the US$17b purchase of US-based independent power producer Calpine Corporation by a consortium led by private equity firm Energy Capital Partners.
Utilities will target cross-border deals despite political risks
P&U respondents say high levels of government intervention, including changes in trade policy and protectionism, remain the biggest perceived risk to growth.
Q: What do you believe to be the greatest economic risk to the growth of your core business?
Despite this, foreign investment is still a critical component of the P&U M&A landscape. More than one-third (34%) of Q3 transactions were cross-border deals, and 29% of respondents expect these deals to increase in the next 12 months. As highlighted in our global report, growing pressure to deliver returns to more active shareholders will also impact investment decisions.
Q: What will be the main themes of M&A in the next 12 months?
Top M&A destinations
The US remains a favored investment destination despite increasing scrutiny around deals involving regulatory assets and uncertain federal energy policies.
Growth and portfolio strategy
The need to balance near-term opportunity with long-term value creation is the most difficult task for the C-suite. As expected, the uptick in the economy is translating into expectations that a larger relative share of near-term earnings will come from existing operations. However, inorganic growth is still front and center in the boardroom, and many utilities are embracing innovation through investment in new products or services, particularly across sectors.
Existing operations will drive short-term growth, but cross-sector M&A will boost market share
Q: From where do you see growth within your company over the next 12 months?
Q: Which of the following will be most prominent on your boardroom thinking during the next six months?
Q: What are your main strategic drivers for pursuing an acquisition, joint venture or alliance outside your own sector?
P&U executives looking for deals outside the sector aim to grow market share and acquire innovation.
Disruption and sector convergence
Disruption is a driving force for change in the P&U sector. Utilities will need to act fast to adapt to disruptive trends if they are to capitalize on new opportunities. Technology is changing customer behaviors, creating pressures for sectors to converge to meet new demands.
Fluid portfolio and corporate structures help companies adapt to evolving customer demands
The pace of disruption and innovation, driven in part by changing customer behavior, is compelling companies to review their portfolios more regularly. Those companies that can better identify emerging trends will be able to readjust their portfolios and recycle capital to take advantage of new growth areas.
Q: How frequently are you reviewing your portfolio?
Q: What are the key disruptive forces impacting your sector?
Q: From which sectors do you see most convergence/blurring with your own?
P&U executives foresee vertical integration as a more prominent trend than sector convergence. Despite ongoing commentary on technology blurring sector boundaries to allow new entrants into energy retail and the uptake of electric vehicles suggesting convergence with the automotive industry, P&U executives say convergence between mining and metals and oil and gas is most likely.
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Download Power & Utilities highlights (PDF) Press Release: P&U deal value hits two-year high as confidence soars Power transactions and trends Q3 2017