Power transactions and trends
Renewables and regulated assets continue to attract investors
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).
Buyers across regional markets continue to pursue regulated network assets as the “safe haven” for investment. This trend, as observed in our Q2 edition, saw deals worth US$23.6b in the transmission and distribution (T&D) segment in Q3. They accounted for more than half of the quarter’s total deal value.
Both T&D assets and renewable energy assets (particularly sovereign power purchase agreement-backed projects) continue to enjoy record valuation multiples. However, as these assets become increasingly competitive and opportunities for new conventional power projects become more limited in developed markets, we expect investors to seek out investment opportunities in emerging markets and in innovative disruptive assets, such as battery storage, micro-grids and virtual power plants.
Overall, despite some of the prevailing global economic challenges, we expect M&A deal intentions to remain strong in the coming months. Our latest Power & Utilities Capital Confidence Barometer reveals that 63% of P&U executives surveyed expect the M&A market to remain stable over the next 12 months, while 24% expect it to improve.
Q3 2016 highlights:
Regulated assets continue to attract premium prices: Amid volatile market conditions, investors are persuaded by the prospects of stable and long-term returns from T&D network assets. The average deal size for T&D assets continues to increase — up 200% quarter-on-quarter to US$3.9b in Q3.
More buyers investing in renewables: A political mandate for cleaner energy sources across the globe, coupled with the need to meet energy demand in emerging markets, drives more investors toward renewable energy opportunities. In Q3, 53% of total global deal volume came in the form of renewable assets, valued at US$7.9b.
Investors diversifying into disruptive technologies: Incentivized by the falling costs of PV panels and energy storage batteries, investors venture increasingly into disruptive technologies. We saw sizable new investment and M&A activity in this segment in Q3, particularly in Europe and Asia-Pacific.
Global P&U deal value and volume (Q3 2014–Q3 2016)
Source: EY analysis based on mergermarket data
Global P&U deal value by region (US$b, Q3 2014–Q3 2016)
Source: EY analysis based on Mergermarket data
Regional deal activity
remained the hot spot for deal activity in Q3 — contributing 66% of total global deal value at US$26.3b. Strategic investments by buyers in T&D and renewables assets drove deal value and volume in the region. We also saw merchant investors selling off generation assets to private equity (PE) investors in a bid to optimize their portfolios
In Europe, deal value reduced slightly, compared with Q2, despite a 40% rise in average deal size quarter-on-quarter. Investment in regulated network assets, renewables and disruptive technologies remained at the top of investors’ capital agendas.
Overall, activity was subdued in the Asia-Pacific region, compared with the previous quarter. At US$5.7b, total deal value was down by 39% quarter-on-quarter. However, renewable energy deals drove transactional activity in the region. China and India contributed 77% of the region’s total deal value in Q3.
Africa and the Middle East
Investment activity in the P&U sector in Africa and the Middle East continues to be dominated by greenfield investment, with some small brownfield deals. The ongoing need for electrification provides significant opportunity for new conventional power and renewable energy projects in the region. China has emerged the most significant investor in Africa.