Confident power and utilities executives push M&A intentions to record high

A stronger power and utilities economy sets the scene for a robust M&A environment, though utilities may face tougher competition for assets.

Sixty-three percent of global power and utilities (P&U) executives expect to pursue M&A in the next 12 months, according to the EY Global Capital Confidence Barometer. P&U executives are confident of economic growth, with 94% of Capital Confidence Barometer respondents expecting global economic growth to improve and 92% anticipating growth within the sector. These figures show a remarkable improvement from this time last year, when results were 76% and 61%, respectively.

This confidence is driving an expected uptick in P&U mergers and acquisitions activity, with a record high number of P&U executives saying they will actively pursue M&A over the next 12 months. Most (83%) also expect an improving market for dealmaking in the sector.

The desire to transact comes as the sector transitions from a traditional landscape to a system that will be defined by a new, changed market and technological conditions. Dealmaking in 2019 will be shaped by P&U companies’ decisions around the role they intend to play in this new ecosystem.

Almost all respondents (97%) say they plan to make significant investments in technology this year, with improving customer experience (24%) and creating new services or products (20%) representing the two main focal areas. Another 20% of those surveyed indicated they will make use of automation and artificial intelligence to increase personalized service offerings and customer service.

As new technology startups emerge, this may become a key focus of M&A. Seventy-two percent of respondents indicated technological innovation would have a very influential impact on their companies’ deal strategy.

To successfully implement an innovation strategy, companies need support from investors, regulators and boards of directors. P&U executives should consider working closely with stakeholders, including regulators, to legislate changes that allow them to pursue new, commercially competitive business models and innovative funding mechanisms.

However, P&U companies looking to make deals may face potential challenges:

• Increased competition for assets, mainly from financial sponsors, will be an issue, according to 86% of respondents. Greater convergence, particularly with the oil and gas sector, may compound this challenge.
• The valuation gap between buyers and sellers is the widest since the global financial crisis, say 89% of respondents. This is mainly a result of more activity involving digital and startup companies, which 84% of respondents report is difficult to value using traditional valuation methodologies.
• Activist shareholders are making companies take specific actions to reexamine their asset portfolios, according to 87% of respondents.
• Hostile and competitive bidding is expected to increase over the next 12 months, according to 92% of respondents.