P&U companies are better prepared than most to address the immediate implications and see M&A opportunities in a post-pandemic world.
Crises create enormous risks for companies. They also generate opportunities. It is clear from the results of the latest EY Global Capital Confidence Barometer that power and utilities (P&U) executives are starting to look to the future, even as they address the immediate needs of keeping their people safe and their companies operating.
P&U executives express less pessimism at a sector level
Widespread containment measures implemented in response to COVID-19 have generated significant disruption to economic activity. With the sharp slowdown in industrial and commercial activities, demand for electricity has dropped by approximately 15% to 20% across Europe, India and the US. While dramatic, EY Global Capital Confidence Barometer results — which captured the sentiment of survey respondents between 4 February and 26 March 2020 — suggest that as an essential provider of electricity, gas and water, the P&U sector has been less significantly impacted than many other sectors, especially when compared with consumer-facing sectors, such as tourism, hospitality and retail. Among utility subsectors, however, there has been diversity regarding the impact.
Electricity and gas retailers were the first to experience the negative effects of the pandemic. Household utility consumption increased as people spent more time at home. However, this couldn’t offset the sharp drop in industrial and commercial demand. Electricity generators followed, with many seeing declines in revenues and pricing as supply chains and commercial businesses in many parts of the world remain shuttered. Meanwhile, renewables producers, capturing a greater market share of total generation with assets that have guaranteed tariffs, have been relatively shielded from the impact and will remain relatively healthy in the short- and medium-terms.
Bolt-on acquisitions and expansion fuel M&A appetite
Cautiously optimistic about economic growth within the sector and the M&A market, P&U executives have more confidence than their global peers about returning to dealmaking post-crisis.
In the first six weeks of 2020, as stock markets reached record highs, 48% of P&U respondents expected the M&A market to improve in the following 12 months. As COVID-19 advanced into a global pandemic, this rose to 59%.
And it appears P&U executives expect to turn sentiment to action, with 58% of respondents surveyed after 19 February 2020 saying they will pursue M&A in the next 12 months.