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Europe

Power transactions and trends | Q4 2017

How are investment strategies positioning European utilities for growth in 2018?

2017 was a difficult year for M&A in Europe’s P&U sector as pool prices and electricity demand stayed low. But, utilities are making moves to transform their investment strategy and reposition for growth in new energy.

EY - Europe Infographic

Europe deal value and volume, by segment
(announced asset and corporate-level deals, Q4 2015–Q4 2017)

EY - Europe deal value and volume, by segment

Europe deal value and volume, by segment
(announced asset and corporate-level deals, 2013–2017)

EY - Europe deal value and volume, by segment

Source: EY analysis based on Mergermarket data.

Q4 2017 transactional highlights

In Q4 2017, deal value in Europe’s power and utilities (P&U) sector shifted back toward investment in transmission and distribution (T&D) and renewables, a trend that has persisted through the year.

Key figures:

  • 2017 deal value reached US$50.3b
  • Q4 deal value decreased 22% from Q3 to reach US$13.3b
  • 213 deals in 2017, up 11% from 2017
  • 120 renewables deals made up 30% of deal value
  • 41 networks deals contributed 27% of deal value
  • 17 generation deals contributed 26% of deal value
  • 35 deals in the “other” segment (including integrated utilities) contributed 16%

Read our full Europe report here

Investment highlights in 2017:

  • Renewable assets remained investment priorities, with deals in clean energy growing 24% in value and 29% in volume.
  • Nuclear phaseout continues with Germany closing another plant in December and Switzerland voting to shut existing nuclear and not build any new plants.
  • More investment in battery technology will help regulate grid frequency amid growing use of wind and solar.
  • Generation deals doubled to 17, contributing 26% to deal value. This is up from seven deals that contributed just 1% of total deal value in 2016.  Much of the increase in value is due to the acquisition of 47.12% of Uniper shares by Fortum.

Europe regional capital flows, 2017

EY - Europe regional capital flows, 2017

Source: EY analysis based on Mergermarket data.

Top five Europe deals, Q4 2017

All deals are announced deals, and the values indicated are disclosed enterprise values comprising equity and debt components.

EY - Top five Europe deals, Q4 2017

Source: EY analysis based on Mergermarket data.

Valuations snapshot

Average EV/EBITDA trading multiples for select utilities

(on FY2 consensus earnings-per-share estimates, 2011–Q4 2017)

EY - Average EV/EBITDA trading multiples for select utilities

Note: The valuations analysis only contains pure-play publicly listed companies in each relevant market segment.

Sources: Bloomberg, EY analysis

Average P/E trading multiples for select utilities

(on FY2 consensus earnings-per-share estimates, 2011–Q4 2017)

EY - Average P/E trading multiples for select utilities

Note: The valuations analysis only contains pure-play publicly listed companies in each relevant market segment.

Sources: Bloomberg, EY analysis

In 2017, the European P&U sector traded at a two-year forward EV/EBITDA (enterprise value by earnings before interest, tax, depreciation and amortization) ratio of 8.4x, a 3% premium to the 2016 average and a 7% premium to the long-term average. The P/E (price to earnings) ratio in 2017 was 15.9x, a premium of 3% to the long-term average x and an 18% premium to 2016.

Q4 valuations:

T&D

  • Two-year forward EV/EBITDA ratio: 11.1x – 0.4% premium to Q3, 14% premium to long-term average
  • Two-year forward P/E ratio: 14.1x – 1% discount from Q3 (14.2x), 4% premium to long-term average

What it means: Investors expect an upside in earnings and will continue to seek these assets.

Integrated

  • Two-year forward EV/EBITDA ratio: 7.1x – 0.9% premium to Q3, 5% premium to long-term average
  • Two-year forward P/E ratio: 12.5x – 0.9% discount to Q3, 8% premium to long-term average

What it means: A lack of large transactions has kept valuations steady.

Renewable energy

  • Two-year forward EV/EBITDA ratio: 7.3x – 4.2% premium to Q3, 5% premium to long-term average
  • Two-year forward P/E ratio: 23.2x – 7.9% premium to Q3, 50% premium to long-term average

What it means: Investors expect earnings to decrease and may consider these assets overvalued.

Independent power producers

Just three deals in Q4 (1.9 GW of gas generation assets acquired for US$140/MW) do not allow for meaningful valuation figures.

What it means: The decline of thermal energy is deterring investment.

How can advancing new technologies accelerate growth for Europe’s utilities?

After a year of shifting strategies, Europe’s utilities have laid the stepping stones for a new approach to investment. The focus in 2018 will be on earnings growth, and we expect five transaction trends.

  • Consolidation in electricity retail: Expect this trend to be strong in the UK where the Government’s moves to limit the cost of electricity tariffs will further tighten retailers’ margins and prompt consolidation within Europe.
  • Continued investment in renewables: An estimated 110 GW of renewable energy is expected to be commissioned across Europe between 2018 and 2025, requiring an annual investment of US$18b.
  • Opportunities in batteries and gas: About 80 GW of coal and nuclear capacity will go offline in Europe by 2025, increasing the need for gas generation, battery storage and other digital capabilities to improve system flexibility and reliability.
  • More interest in new energy: Utilities will increase investment in new energy technologies to take advantage of changes within P&U and other sectors. For example, E.ON is partnering with Danish electric vehicle (EV) charging startup Clever to invest US$12m in a network of fast-charging EV stations across Europe.
  • Growing sector convergence: EVs are also one of the drivers behind more interest in energy from investors in adjacent sectors. For example, Shell plans to develop EV charging infrastructure across London, while French oil and gas company Total has acquired a 23% stake in Eren, a renewable energy company.

Client insights

Read our client story about Fintan Slye, Director of the UK System Operator at National Grid UK, who discussed energy markets and how he sees the system operator role changing.

EY Europe Transaction Advisory Services (TAS) P&U contacts

Matt Rennie
Global TAS Power & Utilities Leader
Brisbane, Australia
+61 7 3011 3239

Arnaud De Giovanni
Head of TAS Power & Utilities, EMEIA
Paris, France
+33 1 55 61 04 18

Remigiusz Chlewicki
Central & Southern Europe TAS
Power & Utilities Leader
Warsaw, Poland
+48 22 557 7457

Edgars Ragels
Commonwealth of Independent States TAS Power & Utilities Leader
Moscow, Russia
+7 495 755 9724

Umberto Nobile
Mediterranean TAS Power & Utilities Leader
Milan, Italy
+39 02 8066 93744

Andreas Siebel
Germany, Switzerland and Austria TAS P&U Leader
Düsseldorf, Germany
+49 211 9352 18523

Stéphane Kraft
Western Europe and Maghreb TAS Power & Utilities Leader
Paris, France
+33 1 55 61 09 28

Michael Bruhn
Nordics TAS Power & Utilities Leader
Copenhagen, Denmark
+45 2529 3135

John Curtin
UK & Ireland TAS Power & Utilities Leader
London, UK
+44 20 7951 6257