Power and utilities mergers and acquisitions decline 30% in Q1 2012

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  • Deal values rise 20% on the back of renewed activity in generation
  • Natural gas prices sink to 10-year low in the US, impacting renewables
  • Growing number of asset disposal programs by European utilities and government privatization programs expected to drive deal flow in the short term

New York, 17 May 2012 – The re-emergence of natural gas as the preferred fuel source for power generation is having a significant knock-on effect for power and utilities M&A activity according to the EY Power Transactions and Trends report, released today. The combination of continued economic uncertainty, tightening financial markets and disparity in global gas pricing has resulted in Q1 2012 total deal volume falling 30% from Q4 2011 and a 16% drop in corporate deal volumes year-on-year.

Joseph Fontana, EY Global Transaction Advisory Power and Utilities Leader, comments, “The continued decline in natural gas prices in the US remains one of the sectors most talked about issues and is having far reaching effects. We are yet to see the full impact from an M&A perspective, however we expect this to change in the remainder of 2012 as companies seek to position themselves, particularly in the US, for sustained low prices and abundant supply.”

Q1 2012 saw a value decline of 55% year-on-year, primarily due to the sharp decrease in M&A activity led by slow economic recovery. However, recent activity in the generation segment bucked the downward trend and increased total Q1 2012 deal value by 20% over Q4 2011 reaching US$26.0bn, with generation contributing 63% of global deal value. This is largely due to GDF Suez’s US$10.1bn amended offer for the remaining equity in International Power Plc, which was launched in late March 2012.

With many regulators globally focusing on pollution reduction and air quality improvement, power and utilities are looking to re-align their fuel mix with a focus on clean energy. Although renewables accounted for the greatest number of deals (23) in Q1 2012, volume declined 36% over Q4 2011 levels. Renewables are currently struggling to compete against gas-fired generation. This is due to low natural gas prices in North America, higher capital costs and the recent pull-back in the levels of government support or consumer subsidy for wind and solar, in both Europe and the US.

Europe continued to shape the global power and utilities M&A landscape during Q1 2012, accounting for 48% of deal volume and 71% of deal value, through domestic privatization and asset disposal programs. The Eurozone debt crisis and its impact on the power and utilities sector remained central to M&A decisions, with dealmakers balancing financial discipline, consolidation in core markets and the need to gain traction in higher growth emerging markets.

Asia-Pacific Q1 2012 M&A activity, which previously experienced a significant growth rate of over 70% in Q4 2011, reported a deal volume drop of 58% and a deal value decline of 35%, compared to the previous quarter, as the region returned to more sustainable deal levels. Americas’ deal volume maintained an overall flattish trend during the quarter.

Looking forward, Fontana comments, “While fiscal tightening by European banks might restrict future M&A activity, the growing number of asset disposal programs by European utilities and government privatization programs is expected to drive deal flow in the short term. We also expect significant activity in Latin America, particularly Columbia, Brazil, and Chile, reflecting strong underlying economic growth and restricted access to credit forcing M&A to be top of mind.

Asia-Pacific investors, particularly those in China and Japan, are likely to continue to feature prominently in the 2012 M&A space. Chinese investors have demonstrated their willingness to acquire overseas and any further softening of asset valuations in Europe will spark deal interest among Asia-Pacific buyers.”

Edgars Ragels, EY's CIS TAS Power & Utilities Leader: “One reason for a growing number of transactions in the short term will be the purchase by Russian oil, gas and energy companies of energy assets in European countries. We expect Russian companies to take an active part in state privatization programs and sales of energy assets to private companies.”

About the survey
Power Transactions and Trends Quarterly is based on EY’s analysis of Mergermarket data from Q1 2010 to Q1 2012. This analysis utilizes standard industrial classification codes in order to categorize deals. For the purposes of this publication, our definition of power and utilities is only those companies in the generation, transmission and distribution, renewables and other subsectors.

About EY’s Global Power & Utilities Center
In a world of uncertainty, changing regulatory frameworks and environmental challenges, utility companies need to maintain a secure and reliable supply, while anticipating change and reacting to it quickly. EY's Global Power & Utilities Center brings together a worldwide team of professionals to help you achieve your potential — a team with deep technical experience in providing assurance, tax, transaction and advisory services.

The Center works to anticipate market trends, identify the implications and develop points of view on relevant sector issues. Ultimately it enables us to help you meet your goals and compete more effectively. It’s how EY makes a difference.

About EY
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