2 minute read 6 Nov 2018
Improved M&A outlook for energy, despite subdued power and utility conditions

Improved M&A outlook for energy, despite subdued power and utility conditions

By

Miles Huq

EY Global Power & Utilities Transaction Advisory Services Leader

Strategic Ernst & Young LLP partner in power and utility transactions. Trusted advisor to clients, colleagues, friends and family.

2 minute read 6 Nov 2018

Energy executives are confident of global growth and more than half intend to pursue M&A, despite some cautions.

This article is part of our M&A report Global Capital Confidence Barometer, 2nd half 2018.

Around the world, executives remain confident in the global economy. With another year of strong GDP growth forecast, power and utilities (P&U) leaders are optimistic, with 86% expecting improving growth conditions for the global economy over the next 12 months.


This boosted confidence is much needed for the P&U sector, which has seen many companies experience lower sales from stagnant growth as rising energy efficiency and more distributed energy impact revenues. But, despite overall economic optimism, confidence at an industry level is subdued: only 64% of P&U executives anticipate economic growth within the sector.

P&U economic growth conditions

64%

of executives anticipate economic growth within the sector

Confidence in overall global economic growth is driving improved M&A conditions and, within P&U, dealmaking intentions remain at record levels. The quarterly Power Transactions and Trends report reveals that P&U deal value in the third quarter of 2018 totaled US$61.9b, with a year-to-date value of US$240b. Despite some rises, global interest rates remain at historic lows, confidence is growing around credit and access to capital, and rising stock market and equity valuations are providing high stock currency for dealmaking. This high stock currency is prompting many P&U companies to transact, with more than half (57%) of executives expecting their companies to pursue a transaction in the next 12 months. Private equity firms are also showing significant interest in the sector. These investors hold an enormous amount of capital and dry powder for investments, which is driving a robust M&A environment.

Assets in high demand

69%

of executives see increasing competition for assets

In every region, P&U companies are focusing on climate goals. They are growing investments in renewables, improving the efficiency of natural gas-fired generation to ensure the stability and security of the grid, and committing to phasing out coal and, in some regions, decommissioning nuclear. More companies are exploring new technologies, including battery storage, electric vehicle infrastructure and digital grid technologies. We are seeing an industry-wide attitude shift as corporates pursue these investments – P&U executives are beginning to embrace disruption instead of seeing it as the largest barrier to growth.


Potential tailwinds to the utilities M&A market may come from risks to growth from policy missteps, such as trade wars. P&U executives say geopolitical issues are their greatest near-term barrier to growth. More than one-third (39%) of executives cite regulation, policy and political uncertainty as the biggest risk to dealmaking over the next 12 months. This political uncertainty has the potential to derail industry confidence and disrupt market outcomes, unless tightened regulatory controls can be achieved.

Summary

Confidence in overall global economic growth is driving improved M&A conditions and, within P&U, dealmaking intentions remain at record levels. Power and utilities industry growth expectations are lower than the global outlook, but credit, confidence, valuations and significant investor interest contribute to a robust M&A environment for the sector.

About this article

By

Miles Huq

EY Global Power & Utilities Transaction Advisory Services Leader

Strategic Ernst & Young LLP partner in power and utility transactions. Trusted advisor to clients, colleagues, friends and family.