EY - Power transactions and trends Q2 2014

Power transactions and trends

Global power and utilities mergers and acquisitions review, Q2 2014

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Deal activity hits four-year high

Global mergers and acquisition (M&A) activity in the power and utilities (P&U) sector continues to gather pace, with deal value reaching a four-year high of US$1b in Q2 14.

Global P&U deal value and volume, Q2 2012 - Q2 2014

EY - Global P&U deal value and volume Q2 2012–-Q2 2014

The quarter saw 12 transactions exceeding US$1b each, driven largely by:

  • Corporate mergers in the US
  • The beginning of privatization processes in Turkey
  • Consolidation in the Russian power generation segment

Megadeals dominate

In Q2, amid continuing low wholesale power prices, diversified utilities in the US were keen to expand operations and achieve synergies through mergers.

As the focus shifts toward strengthening regulated asset portfolios, utilities are offering rich premiums to acquire quality assets, as evidenced by the US$12b Exelon/Pepco and US$9b Wisconsin/Integrys Energy mergers.

Merchant assets, on the other hand, are attracting interest from financial investors and pure-play Independent Power Producers (IPPs).

Market reform and unbundling in the spotlight

Market reform and unbundling processes are under way in several new geographies as regulators cut inefficiencies and governments raise capital to fund new infrastructure:

  • In the Middle East, countries including Saudi Arabia and Oman are unbundling and privatizing state monopolies in the hope of attracting private investment
  • In Australia, both the New South Wales and Queensland Governments are advancing plans to allow private sector investment in regulated grid assets
  • The easing of Chinese outbound investment rules should see state-owned Chinese utilities joining a large field competing for these network transmission and distribution assets.

In Europe, overcapacity and tariff pressures continue to put conventional power generation under pressure, challenging the current business models employed by the sector’s major players.

We expect increasing focus on energy services and growth in emerging markets to spur M&A activity in the next six months.

Looking ahead

As the utilities industry slowly transforms toward a more information-driven service industry, innovations, emerging technologies and new entrants will be key points on boardroom agendas.

Look for this trend to gain momentum in mature markets such as the US and Japan as large non-traditional players enter the electricity value chain.

We expect large consolidation and sector disruption to drive what promises to be a strong year for P&U transactions globally.

Key findings, Q2 2014

  • Deal activity surged on the back of large US corporate mergers. Deal value doubled from Q1 14 to reach US$58.1b, while volume increased 32% to 128 deals.
  • Strategic buyers, primarily large integrated utilities, featured heavily this quarter as they targeted growth and consolidation. Financial buyer activity dipped to historic lows, reaching just US$4.7b compared to US$14.3 in Q1 14.
  • Average deal value in the Americas reached US$1.4b compared to US$336m in Q1 14. The region hosted seven transactions over US$1b in the quarter.
  • Americas renewables deal value reached a three-year high, contributing 86% to the total renewables deal value. Europe dominated the volume as utilities strive to optimize asset portfolios through shedding nonperforming assets.
  • Asia-Pacific deal value doubled to reach US$7.9b, fuelled mostly by privatization programs in Australia and consolidation in China.