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Portfolio shifts to dictate utilities’ dealmaking

Global Capital Confidence Barometer | Power and Utilities | 18th edition

Our latest M&A report reveals a confident global power and utilities (P&U) sector

Dealmaking looks set to continue, underpinned by a buoyant economic outlook on the back of the stronger-than-expected economic turnaround in Europe and positive growth in the US and China. As new technologies begin to impact traditional operating models, divestitures will be a critical component for P&U companies seeking to realign their portfolios for this new operating environment.

Macroeconomic environment and M&A outlook

P&U respondents expect improving economic conditions to drive deal activity. Executives anticipate an increase in M&A activity, and, as competition for P&U assets heats up, utilities will need to be prepared to act fast and with strategic discipline. Deal scarcity, competition for high-quality assets and increasing inflation are seen as the greatest risks to dealmaking.

P&U companies to pursue M&A

P&U companies expect to actively pursue M&A — this trend is set to continue through the year. Dealmaking intentions were clear in the first quarter of 2018, as evidenced in our Power Transactions and Trends report — deal value hit an all-time quarterly high of US$97b.

Do you expect your company to actively pursue mergers and acquisitions in the next 12 months?

Competition set to increase

Competition, particularly from financial sponsors, is expected to increase. This will intensify competition for high-quality assets in the deal market, putting upward pressure on valuations and increasing bid-ask spreads.

EY - Q: Do you expect to see increasing competition for assets in the next 12 months?

EY - Q: Have you either failed to complete or canceled a planned acquisition in the past 12 months?

EY - Q: What do you see as the biggest potential risk to dealmaking in the next 12 months?

Growth and portfolio strategy

Portfolio transformation is at the top of the boardroom agenda. P&U companies are keen to divest underperforming assets and invest in developing economies and emerging technology as sector disruption takes hold.

Disruption sees portfolio reviews focus on divesting assets

EY - Q: How frequently are you reviewing your portfolio?

EY - Q: Is this more frequent than three years ago? And what is the key reason for reviewing your portfolio more frequently

EY - Q: As a result of your most recent portfolio review, what was the main action taken?

Top M&A destinations — investors look to developing economies

Brazil has emerged as the top P&U investment destination as corporates move to take advantage of the country’s privatization agenda and government tenders for renewable energy development.

EY - top five P&U investment destinations

External environment

P&U executives continue to be concerned about political uncertainty and say it is the key risk to growth, while rising inflation is cited as the biggest threat to investment plans. But these risks are moderated by increased infrastructure spending and — surprisingly — most executives do not expect US tax reform to impact deal activity.

Political uncertainty remains greatest economic risk while inflation emerges as investment risk

EY - Q: What do you believe to be the greatest near-term risk to the growth of your business?

EY - Q: What is the bigger risk to your current investment plans?

US tax reform won’t impact investment decisions

EY - Q: Do you expect the recent changes in corporate taxation in the US to have an impact on global M&A?