2 minute read 8 May 2019
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Confident power and utilities executives push M&A intentions to record high

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 8 May 2019

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.

Expected M&A

63%

of P&U executives expect to pursue M&A in the next 12 months.

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.

Technology investment

97%

of P&U executives expect to make a significant investment in technology this year.

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.

Widening valuation gap

89%

of respondents say the valuation gap between buyers and sellers is the widest since the financial crisis.

Summary

Confidence in the power and utilities economy has resulted in a record high number of companies saying they will seek M&A in the next 12 months. Competition for assets is likely to increase and the growing valuation gap between buyers and sellers may challenge deals.

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.