2015 review and 2016 outlook
Power transactions and trends
Convergence and renewables drive surge in dealmaking
Around the world, we see more evidence that utilities and investors are using mergers and acquisitions (M&A) as a strategic tool to adapt to changing dynamics within power and utilities (P&U). 2015 recorded P&U deal value totaling US$200b – a six-year high and a 13% jump on 2014.
We saw several key themes behind the year’s transactions:
Convergence and midstream/upstream investment: Whether through electric and gas (mega)mergers in the US, convergence with telecommunications companies (telcos) in Japan or an increase in technological partnerships in Europe, utilities are considering diverse avenues for growth.
Contracted renewable energy assets in demand: Renewables captured the lion’s share of deal activity in 2015, as investors moved to add wind and solar assets to comply with regulations and reduce exposure to volatile coal and gas.
Emerging markets attracted investment: Utilities in Europe and the US are seeking growth in emerging markets, such as Sub-Saharan Africa, as well as Mexico, Vietnam and Indonesia.
Disruptive trends become mainstream: Energy storage, and its supporting IT integration applications, is becoming a mainstream investment for utilities, many of which formed partnerships with technology companies and telcos.
Energy reforms drive opportunities: Unbundling and privatization continue in many energy markets. African governments are progressing reforms to attract investment for infrastructure build while those in the Middle East are opening doors to private and foreign capital in response to falling oil prices.
Electrification, reforms and disruptive technology will drive 2016 transactions
While the US federal rate hike, tough conditions in Europe and a slowing Chinese economy are likely to impact investments and valuations, utilities are accelerating growth agendas and acquiring assets that can be rewarded by investors. Sentiment toward renewables will strengthen on the back of COP21, while gas demand will rise across geographies amid depressed prices. We expect to see more rebalancing of roles and assets in developed countries as the gradual transformation of these markets continues.
The retailer-only model will struggle for sustainability, with the continual push for scale and “cost-out” proving difficult for those caught between niche and large-scale operations. We expect these mid-range retailers (with between 500,000 to 3 million customers) to seek strategic acquisitions to secure a place in the value chain that relies, not just on low margins and high quality service, but on controlling or owning these assets. Our sense is that this will revolve around load management capabilities associated with storage, metering and meter data.
Energy technology, especially battery storage and connected homes, and a growing trend by consumers toward grid independence will also set off a new wave of M&A, with technology companies and utilities forming partnerships.
It’s too early to see the impact of batteries and solar on network valuations, which we expect to rise and then peak over the next 18 months as the long-term nature of distributed energy becomes clearer. Valuations in the generation/IPP space are likely to remain subdued.
In emerging markets, particularly in Sub-Saharan Africa, Vietnam and Indonesia, electrification and reforms will boost transactions involving financial investors, advisory firms and traditional utilities, often in joint ventures. Reforms in Mexico, Saudi Arabia and Japan will provide a secondary but significant source of investment and transactional activity.
While ongoing economic uncertainty in many markets may color some P&U deals in 2016, EY’s recent Capital Confidence Barometer revealed optimism from executives regarding future M&A activities. We expect this confidence and the strong trends currently shaping our industry to combine to deliver another blockbuster year for the global utilities industry in 2016.
Global P&U deal value and volume (Q4 2013 – Q4 2015)
Global P&U deal value by region (US$b, Q4 2013 – Q4 2015)
Source: EY analysis based on mergermarket data
Regional deal activity
Transforming conditions drive utilities to restructure and expand downstream operations
Six-year high driven by activity in China
Convergence gathers pace as utilities seek new growth opportunities
Africa and the Middle East
Reforms, renewables and oil prices dictate investments