EY - Power transactions and trends, Q2 2013

Power transactions and trends

Global power and utilities mergers and acquisitions review, Q2 2013

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Q2 2013 M&A up 30% in three months

Q2 2013 was an exciting quarter for the global power and utilities (P&U) sector, with deal value rising 30% to US$33b, up from US$25.3b in Q1 2013. While volume remained flat, there were a handful of multi-billion-dollar transactions.

The US$10b acquisition of NV Energy by MidAmerican Energy Holdings, and TECO Energy’s acquisition of New Mexico Gas Company for US$950m were marquee deals within the US this quarter.

Global P&U deal value and volume, Q2 2011–Q2 2013

EY - Global P&U deal value and volume, Q2 2011–Q2 2013

Source: EY analysis based on mergermarket data

To drive broader economic growth, the US Federal Reserve has kept interest rates low, sending investors scrambling for higher yields. However, with the economy continuing to improve in 2013, the Fed could begin reducing its unprecedented bond buying program.

The valuation of P&U stocks rose in recent years as investors pursued higher yields amid a low interest rate environment. However, the recent pull-back in utilities, which were trading at record valuation levels in April, could signal trouble. Shrinking valuations may lower at least one hurdle to large utility mergers.

Europe continued to witness divestments by large utilities that are still restructuring asset portfolios. Regulatory uncertainty around renewables and environmental mandates around coal have made gas an important constituent of the region’s generation mix.

Utilities including EDF, Snam and Centrica undertook M&A to acquire strategic gas assets during the quarter. Centrica’s acquisition of shale gas interests in the UK and Canada was a notable move.

Upcoming privatizations in Greece, Finland, New Zealand and Africa could result in billion-dollar-plus transactions in the year. Combined with expected robust activity in the US, this could make for a busy second half of 2013.

Despite a decline in financial buyer activity this quarter, we see new financial investment hubs emerging in areas such as Japan and the Middle East, which are looking to expand foreign investments.

Key findings, Q2 2013

  • US$10b NV Energy/MidAmerican deal headlines Q2 global P&U transaction activity; total M&A registers US$33b, up US$7.6b (30%) on previous quarter. Generation and integrated deals in the US underpinned strong growth in Americas M&A, which reached US$15.1b, up $9.6b on Q1 2013.
  • Europe faces headwinds in an uncertain regulatory environment, particularly for generation. Absence of large transmission and distribution (T&D) divestments drags deal value down 46%. This is mainly a timing issue, as large T&D disposals are anticipated in various northern European jurisdictions later this, or early next, year.
  • Asia-Pacific M&A increases 71% on prior quarter: domestic Chinese M&A contributed 81% to the region's deal value, largely driven by the US$7b merger of two state-owned power and gas companies. Expansion into Australian T&D assets also remained a key focus for Chinese companies.
  • UK water and waste utilities continue to attract significant investor interest, with water transaction valuations climbing to premiums of more than 30% on regulated asset base.