Megadeals in networks, IPPs and integrated utilities drive deal value
Deal value within the global power and utilities (P&U) sector in Q3 climbed to a two-year high, driven largely by significant increases in the Americas (+798%) and Europe (+60%). Asia-Pacific deal value declined as renewables dominated and, in Africa and the Middle East, a new Japan-Africa initiative heralds potential progress in electrification (read more about this in Matt Rennie’s blog).
Investors are still attracted by network assets that offer regulated returns and, as in Q2, we saw many low-value renewables deals and some larger asset privatizations, mostly in Europe. But Q3 also saw the emergence of two new trends: the return of large independent power producer (IPP) deals and the acquisition of distressed or over-leveraged assets. The megadeals behind these two trends are creating larger, more diversified P&U portfolios.
Global P&U deal value by segment Global P&U deal value and volume by region
(announced asset and corporate-level deals, Q3 2015-Q3 2017) (announced asset and corporate-level deals, Q3 2015-Q3 2017)
Source: EY analysis based on Mergermarket data.
Top five global deals
The quarter’s top five deals reveal interesting insights on investment conditions within the sector:
Sempra’s acquisition of Oncor
California-based utility Sempra Energy has tabled an offer to buy a 60% stake in Oncor Electric Delivery Company LLC from financially distressed utility Energy Future Holdings (EFH) for US$18.8b, including US$9.35b of debt. Sempra outbid Berkshire Hathaway’s US$9b offer, which was opposed by EFH’s largest creditor. Through this deal, Sempra will gain Oncor’s electricity distribution assets and add 10 million Texas-based customers to its base. Sempra’s existing portfolio is focused on growth in unregulated segments, including electricity retail, which is marked by flat to declining consumption. By acquiring Oncor’s regulated assets, Sempra aims to realign its risk allocation, maintain its credit rating and access a customer base that shows signs of growth. Sempra is paying EFC the equivalent of 23 times Oncor’s earnings and has also committed to invest US$1.5b per year, which will drive 6% annual growth in Oncor’s earnings through 2021. The transaction is expected to be completed in the first half of 2018 and is subject to closing conditions and other regulatory approvals.
Purchase of Calpine by a consortium led by Energy Capital Partners
A consortium led by private equity firm Energy Capital Partners (ECP), and including Access Industries, Inc. and Canada Pension Plan Investment Board (CPPIB), agreed to buy US-based IPP Calpine Corporation in a deal valued at US$17b, including US$5.5b in cash and US$11.5b in debt, after Calpine announced its intention to sell earlier this year. Calpine is one of the US’s few remaining highly levered, publicly listed power generators. Publicly owned IPPs are seeking to address high leverage ratios to a level of 4x to 5x net-debt-to-EBITDA as investors and credit agencies are becoming concerned about debt levels. The deal was concluded at a premium of 51% above Calpine's unaffected stock price prior to the announcement. The transaction will strengthen the financial position of debt-burdened Calpine as ECP looks to reduce debt alongside a longer-term view to pivot Calpine’s strategy, a feat more easily achieved when the company is privately held. ECP is one of the most active private equity players in the US power sector and brings deep industry expertise and a long-term investment horizon. After the deal announcement, Calpine’s share price jumped 9.6% to US$14.80 on 18 August 2017 – the highest since July 2016. The transaction was unanimously approved by Calpine’s Board, although finalization of the transaction requires final shareholder and regulatory approval.
Fortum’s takeover of Uniper
Finnish clean energy utility Fortum has launched a takeover for a minority stake (46.65%) in Uniper SE, the conventional generation spin-off of German utility E.ON, for US$11.5b. The offer represents about a 4.5% premium to Uniper’s closing price on the offer date. The transaction has taken Uniper by surprise and left some analysts questioning the rationale behind the bid. Despite Fortum stating it will be a long-term strategic investor, there are suggestions that the company is targeting Uniper’s European hydropower and nuclear assets with an eye to furthering its clean energy vision. Some say that Fortum will sell Uniper’s thermal generation plants upon completion of the transaction. The deal is expected to be completed in mid-2018, subject to competition of final approvals and other customary closing conditions.
Westar Energy and Great Plains Energy merger
The all-share merger of US vertically integrated utilities Westar Energy and Great Plains Energy for a transaction value of US$8.2b creates a new company, Monarch Energy Holding, Inc, with a combined equity value of US$14b, 13,000 MW of generation capacity, almost 10,000 miles of transmission lines and more than 51,000 miles of distribution lines. Great Plains had made a previous attempt to buy Westar, but the move was blocked by state regulators after a year of consolidation discussions. This transaction allows both entities to benefit from complementary operations, adjacent territories, shared generation assets and an expanded footprint. The combined company is expected to have a strong balance sheet and improved free cash flows and is expected to create cost savings and net synergies of US$35m to US$45m in 2018 and US$140m to US$170m by 2021. The deal is pending approvals from shareholders of both companies and regulators, including the Federal Energy Regulatory Commission and the Nuclear Regulatory Commission.
Hydro One’s acquisition of Avista
The US$5.2b acquisition by Canadian network company Hydro One Limited of US-based integrated utility Avista Corporation will create a combined entity with assets worth US$25.4b and more than two million customers across North America, including Ontario, Washington, Oregon, Idaho, Montana and Alaska. The purchase price is about 11.2x Avista's EBIDTA, a premium compared to an average of 9.3x for comparable deals. The acquisition allows Hydro One to diversify into the US, a market that is seen as providing higher regulated rates of return than those in Canada. Hydro One expects the deal to be accretive to its earnings per share in the first full year of operations and is targeting scale efficiencies, shared IT systems and increased purchasing power.