Power transactions and trends
Renewables and network assets remain top priority
This edition of Power transactions and trends reviews quarterly deal activity within the power and utilities (P&U) sector and forecasts the trends that will shape future mergers and acquisitions (M&A).
Top factors shaping investment
When we consider Q2’s most prominent M&A trends, it’s clear that buyers are still seeking “safe bets” amid ongoing sector and global volatility. Regulated network assets and renewable generation remain targets for many investors globally:
- Renewables continue to win buyers: The move toward cleaner sources of energy in most developed countries combined with an urgent need to meet soaring demand in emerging markets is driving investment in renewables in all regions. Some regulatory uncertainty in Europe may result in investors moving capital to safer markets.
- Network valuations benefit from bidding war: For several quarters now, we’ve seen strong competition from buyers for regulated transmission and distribution utilities. The stable and long-term returns of these assets are appealing amid an otherwise volatile environment. A bidding war for an ever-shrinking number of network assets is pushing valuations to record levels.
But behind the big ticket deals that dominate transactional reports such as these, some smaller investments are worth attention as they may indicate how our sector’s continuing transformation is beginning to shape investment decisions:
- Disruptive technologies attract investment: Both utilities and non-traditional investors are shifting their focus to the potential of new energy technologies, particularly distributed energy and battery storage. As consumer demand for these technologies increases, we expect more M&A and partnerships between utilities and companies from outside the sector.
Global investment in disruptive energy technologies is growing fast and the juxtaposition of this trend against that of strong network valuations poses some interesting questions. Are investment decisions based on a clear understanding of the medium to long-term impact of distributed generation on utilities? Are these investment decisions preparing utilities to become a “utility of the future” or are they leaving them vulnerable to new competitors? It's an issue explored further in Matt Rennie's related blog.
Global P&U deal value by region (Q2 2014–Q2 2016)
Source: EY analysis based on Mergermarket
Global P&U deal value and volume (Q2 2014–Q2 2016)
Source: EY analysis based on Mergermarket data
Regional deal activity
contributed the largest share of M&A (US$24.7b), with many deals due to continued US consolidation and convergence. We also saw more deals featuring Chinese buyers and financial investors, particularly from Canada and Asia.
In Europe, renewables helped drive a strong quarter where deal value rose 44% to US$8.2b. Buyers included more Asian investors – the acquisition by China Three Gorges Corporation of an 80% stake in Germany’s WindMW was Europe’s biggest deal of the quarter at US$1.8b. The Brexit result has created some uncertainly and may see investment decisions delayed – read our perspectives on its impact on utilities and business more generally.
Thermal generation and renewables deals, particularly in China and India, and booming demand in Southeast Asia are behind much of the investment in Asia-Pacific (deals reached US$9.4b). Accelerating Chinese energy market reforms are boosting cross-border M&A.
Africa and the Middle East
In Africa and the Middle East, investment in renewables is rising, with Chinese investors behind much of Africa’s rapid energy growth. The decision by some major utilities to invest in mini-grid projects in Africa may be a sign that some emerging markets will “jump” centralized generation and use distributed generation to meet urgent electrification needs. You can read more about this possibility in Matt Rennie's recent blog.