- Power and utilities deal value hits all-time quarter high of US$97b in Q1 2018
- 71% of sector executives expect to see a rise in deal activity within the next year
- Almost half (49%) of all sector deals announced in Q1 2018 were in renewables
Global power and utilities (P&U) deal value rose to an all-time quarter high of US$97b in the first quarter of 2018, with 15 multi-billion-dollar deals alone accounting for 90% of deal value. That is according to EY report Power transactions and trends: Q1 2018 (PTT), which reveals that 48% of total deal value was contributed by one announced European megadeal.
The sector’s strong dealmaking intentions are also reflected in the 18th EY Power & Utilities Global Capital Confidence Barometer (CCB), which finds that 71% of P&U executives expect to see an increase in mergers and acquisitions (M&A) activity and 61% anticipate that the sector economy will improve in the next 12 months. Eighty-four percent of CCB respondents also expect to see increasing competition for assets in the next 12 months, as financial sponsors’ involvement in the market continues to strengthen.
Miles Huq, EY Global Power & Utilities Transactions Leader, says:
“Favorable M&A conditions look set to heat up further for power and utilities, as investors bid aggressively for fewer opportunities amid historically low interest rates, high stock valuation currency and robust access to the capital markets. However, a more complex deal environment is emerging – driven by the entry of nontraditional competitors, the changing generation mix and increasing customer expectations – and challenges such as the introduction of smart technologies and ageing infrastructure are transforming the power and utilities landscape.”
The PTT highlights that nearly half (49%) of all deals announced in Q1 2018 were in renewables, as utilities begin to build and operate renewable assets themselves and as the adoption of electric vehicles continues to boost investment in supporting technologies. Additionally, the CCB finds that 71% of P&U executives now place portfolio transformation at the top of the boardroom agenda, as businesses increasingly look to invest in emerging technologies.
Acquisition of integrated assets drives deal value in the Americas
Sector deal value in the Americas rose to US$29.4b during the first quarter of 2018, up 32% on Q4 2017, driven by low interest rates, robust access to capital and favorable transaction terms. Integrated assets accounted for 58% of total deal value (US$17b), while eight multi-billion-dollar investments contributed US$25.2b. The announced merger agreement between SCANA Corporation and Dominion Energy at the start of the year contributed 49% of the Americas’ quarterly transactional value.
Huq says: “There is mounting pressure on merchant generation in the Americas, with a number of coal and nuclear generators seeking government support. These developments play out against a backdrop of continued investment in renewable energy, with Q1 2018 hosting 22 clean energy deals worth US$3.1b. Momentum in renewables also continues in the US. Despite initial concerns that federal tariff increases on imported solar cells would slow the US solar industry, a continued decline in technology prices and corporations’ resolve to embrace renewables has sustained momentum in this segment.”
German megamerger propels European deal activity
In Europe, the P&U sector achieved record deal value of US$63.1b during the first quarter of 2018, with 96% attributed to renewables, transmission and distribution, and integrated assets. German company E.ON’s acquisition of Innogy was the largest announced deal of Q1 2018, contributing more than 76% of total deal value. The PTT states that if successful, the deal could trigger a fundamental shift in the German market and end the era of vertically integrated utilities.
Huq says: “European power and utilities continue to gravitate toward renewable investment, with 30 clean energy deals announced during the first quarter of 2018 amounting to US$6.3b. And with traditional utilities in Europe continuing to feel the pressure from renewable energy, as well as oversupply and declining demand, we could see more consolidation and a drive toward scale.”
Chinese merger boosts a sluggish quarter in Asia-Pacific
China hosted the largest P&U deal during Q1 2018 in Asia-Pacific, with the announced merger of GD Power’s coal generation assets and China Shenhua Energy. However, total deal value in the region cooled to US$5.8b from a Q4 2017 high of US$13.8b. Deal volume also declined by 46% (27 deals) – the lowest in three-and-a-half years. Investment into the region decreased by 58% from Q4 2017 to US$5.8b, with deal value falling by 90% in renewables and 48% in integrated assets quarter-on-quarter. While 10 clean energy deals represented the majority of the quarter’s transactions by volume, the value of clean energy M&A fell overall during Q1.
Huq says: “China remains the growth story in Asia-Pacific, with both domestic and outbound deals and a greater focus on greenfield investment. But it continues to be a region of contrasts marked by varying investment drivers of diverse economies, and upcoming energy policy decisions will likely determine the landscape for the remainder of the year. Indeed, 47% of global respondents to the 18th Global Capital Confidence Barometer highlight political uncertainty as the greatest economic risk to growth.”
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About EY’s Global Power & Utilities Sector
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 Sector brings together a worldwide team of professionals to help you succeed — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Sector team works to anticipate market trends, identify their implications and develop points of view on relevant sector issues. Ultimately, this team enables us to help you meet your goals and compete more effectively.
For more information, please visit ey.com/powerandutilities.
About Power transactions and trends
The EY analysis and perspectives within Power transactions and trends are based on global financial releases and Mergermarket data, as well as global engagements conducted by EY member firms over the period 2012 to 2018. They provide an up-to-date assessment of outcomes and trends in the global utilities industry.
For more information, please visit ey.com/ptt.
About EY Global Capital Confidence Barometer
The EY Global Capital Confidence Barometer is a biannual survey compiled by Euromoney Institutional Investor Thought Leadership of more than 2,500 senior executives from large companies around the world and across industry sectors. This is the 18th biannual CCB in the series, which began in November 2009; respondents for the 18th edition were surveyed in March and April 2018. Respondents represented 14 industries, including financial services, consumer products and retail, technology, life sciences, automotive and transportation, oil and gas, power and utilities, mining and metals, diversified industrial products, and construction and real estate. The objective of the Global Capital Confidence Barometer is to gauge corporate confidence in the global and domestic economic outlook, to understand boardroom priorities in the next 12 months and to identify emerging capital practices that will distinguish those companies building competitive advantage as the global economy continues to evolve. ey.com/ccb #EYCCB