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Power transactions and trends | Q2 2016

Asia-Pacific

China and India lead recovery in deal activity

After a slow start to 2016, Asia-Pacific power and utilities (P&U) transactions picked up in Q2, led by deals in China and India, which contributed more than 85% of total deal value. These deals highlighted a trend by conglomerates toward diversifying into the energy sector, and continued interest in the renewable energy, and water and wastewater segments.

With growing electricity demand in Southeast Asia expected to outstrip average regional growth, diverse investors are attracted to both the conventional generation and renewable energy segments in this region, particularly in Thailand, the Philippines and Indonesia. Ten P&U transactions worth a cumulative US$1b took place in the Southeast Asia sector during Q2.

Q2 2016 highlights:

  • Indian power sector attracts interest: India’s energy sector hosted deals worth US$2.3b, with investors particularly attracted to operational assets with long-term power purchase agreements (PPAs). Key deals included Malaysian utility Tenaga’s acquisition of a 30% stake in GMR Energy, a generation and transmission and distribution (T&D) company, for US$300m; Hong Kong-based CLP Holdings’ 49% stake acquisition in Suzlon Energy’s 100 MW solar plant; Tata Power’s US$1.4b acquisition of Welspun Energy’s renewable portfolio; and JSPL’s agreement to sell a 1,000 MW thermal power plant to JSW Energy for US$600m .
  • Investors take advantage of low generation asset valuations: Non-energy players and conglomerates are entering the region’s energy markets to diversify revenue. Examples include Sainty Marine Corporation’s US$3.2b acquisition of thermal power generation assets in China and Beacon Electric Asset Holding’s US$473m acquisition of a 56% stake in Philippines-based Global Business Power Corporation.

Highlights

EY - Power transactions and trends: Q2 2016
EY - Power transactions and trends: Q2 2016

 


Top 5 Asia-Pacific deals, Q2 2016

Announcement date (2016)

Target

Target country

Bidder

Bidder country

Deal value (US$m)

Rationale

Segment

29 Apr

Jiangsu Guoxin Investment Group Limited (thermal power generation assets)

China

Sainty Marine Corporation Ltd

China

3,244

Supports Sainty Marine’s strategy to expand its thermal power generation business

Generation: Thermal

12 Jun

Welspun Renewables Energy Pvt. Ltd.

India

Tata Power Renewable Energy Limited

India

1,378

Supports Tata Power's strategy to expand its renewables energy portfolio

Renewables: Wind, Solar

15 Jun

Anhui Construction Engineering Group Co Ltd

China

Anhui Water Resources Development Co., Ltd.

China

1,018

Enables Anhui Water Resources to reduce horizontal competition and improve profitability

Other: Construction Engineering

16 Apr

Tongwei Solar Hefei Co., Ltd.

China

Tongwei Co., Ltd.

China

979

Creates synergy with Tongwei Group’s crystal silicon battery and PV business

Renewables: Solar

04 May

Jindal Steel & Power Limited (1,000 MW power plant in Chhattisgarh)

India

JSW Energy Limited

India

600

Increases JSW Energy’s operational capacity and diversifies its geographical footprint

Generation: Thermal

EY - Top five deals, Q2 2016

Source: EY and Mergermarket analysis

 


Valuation snapshot

Prices reflect reforms and renewables shift

While regulated assets continue to trade at a premium, investors are exploring operational renewable energy assets that can provide higher returns than bond yields. Renewables have also been boosted by increasingly stringent environment regulations that are prompting utilities to realign portfolios.

In China, IPPs are valued below average as competition from renewables increases. The government’s push towards renewable energy is expected to apply more downward pressure, though market reforms that will allow generators to compete to directly supply large commercial customers may boost the valuations of integrated utilities.

Across the region, renewable energy players are likely to witness increasing competition from a diverse buyer community as more governments switch to renewables to meet baseload demand. This is squeezing the valuations of thermal generation assets, resulting in increasing M&A by buyers looking to bolster their operational capacity. The quarter witnessed multiple deals under US$100m by cross-border and domestic utilities shifting slowly toward clean energy portfolios. Due to the limited availability of operational renewable assets in these countries, valuations are likely to be boosted by competition from buyers.

Indian T&D assets and Korean T&D and integrated assets are valued at a discount compared to the group’s regional average (PE two-year forward estimate of 10.2x compared to group average of 15.7x). Valuations in South Korea have historically been low due to the country’s closed sector, although we may see an increase in EV/EBITDA for the country’s utilities as they face pressure to increase dividend payouts and invest in renewables and new technology.

Regulated transmission and distribution (T&D)

Average P/E trading multiples for select T&D utilities

(on FY2 consensus EPS estimates, 2007-Q2 2016)

EY - Average P/E trading multiples for select T&D utilities

Sources: Bloomberg, EY analysis

Generation and independent power producers (IPPs)

Average enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) trading multiples for select IPPs

(on FY2 consensus EBITDA estimates, 2009-Q2 2016)

EY - Average enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) trading multiples for select IPPs

Sources: Bloomberg, EY analysis

Integrated and diversified

Average EV/EBITDA trading multiples for select diversified utilities (excluding Japan)

(on FY2 consensus EBITDA estimates, 2013-Q2 2016)

EY - Average EV/EBITDA trading multiples for select diversified utilities (excluding Japan)

Sources: Bloomberg, EY analysis

 


M&A hotspots and capital outlook

Reforms and cross-border deals will drive activity

We expect the Asia-Pacific region to witness steady M&A across coming quarters. Two key factors will drive activity:

  • Chinese inbound and outbound M&A to continue: China’s ongoing energy reforms will continue to attract foreign investors into its thermal generation and renewable energy segments. EDF has announced it will acquire a majority stake in wind energy developer UPC Asia Wind Management. Beijing Enterprises is reportedly looking to acquire utilities’ assets in Europe, particularly liquefied natural gas (LNG) distribution and sewage treatment project operators, with an aim to achieve at least 10% internal rate of return.
  • Operational renewable assets attract investors: As returns for greenfield solar projects continue to be squeezed due to aggressive solar bidding, it is likely that investors will prefer to acquire operational assets with proven returns rather than participating in auctions, especially in India. M&A can help companies to quickly ramp up their capacity in a country that has ambitious renewable energy plans. However, this is likely to be a short-term measure due to the limited availability of operational assets.
EY - Power transactions and trends | Q2 2016 - Asia-Pacific
EY - Power transactions and trends | Q2 2016 - Asia-PacificEY - Power transactions and trends | Q2 2016 - Asia-Pacific: IndiaEY - Power transactions and trends | Q2 2016 - Asia-Pacific: IndonesiaEY - Power transactions and trends | Q2 2016 - Asia-Pacific: IndonesiaEY - Power transactions and trends | Q2 2016 - Asia-Pacific: IndonesiaEY - Power transactions and trends | Q2 2016 - Asia-Pacific: IndonesiaEY - Power transactions and trends | Q2 2016 - Asia-Pacific: China

China

Q2 2016 Deal value

Q2 2016 Deal volume

Capital outlook

US$5,623m

15

  • Outbound M&A continues to be part of Chinese investors’ strategy. State Grid is reportedly set to acquire a stake in Brazil-based CPFL Energia. China Three Gorges Corporation (CTG) plans to further invest in Brazilian wind and solar power plants.
  • Oversupply of capacity in some markets and competitive selling reforms sees some utilities consider restructuring and M&A in the short-term.

Power transactions and trends | Q2 2016 - Asia-Pacific

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Indonesia

Q2 2016 Deal value

Q2 2016 Deal volume

Capital outlook

US$177m

4

  • Plans to electrify 90% of the country by 2020 and add 35 GW to the power supply by 2019 should attract investors.
  • In May 2016, Marubeni agreed to jointly develop a US$2b coal-fired power plant in the country.

Power transactions and trends | Q2 2016 - Asia-Pacific

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India

Q2 2016 Deal value

Q2 2016 Deal volume

Capital outlook

US$2,284m

4

  • As some renewable energy developers seek to reduce debt, expect deal activity in this segment to pick up. ACME Solar is expected to sell 200 MW of assets while Sun Edison will seek buyers for more than 1 GW of both operational and under-construction assets.
  • UDAY and other reforms should have a positive impact on overall valuations in the energy sector through 2016.

Power transactions and trends | Q2 2016 - Asia-Pacific

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EY Global Transaction Advisory Services (TAS) P&U contacts

Asia-Pacific

Matt Rennie
Global and Asia-Pacific TAS Power & Utilities Leader
Brisbane, Australia
+61 7 3011 3239


Nick Cardno
Oceania TAS Power & Utilities Leader
Sydney, Australia
+61 2 9248 4817


Gilles Pascual
ASEAN TAS Power & Utilities Leader
Singapore
+65 6309 6208


Alex Zhu
China TAS Power & Utilities Leader
Beijing, China
+86 10 5815 3891

Kuljit Singh
India TAS Power & Utilities Leader
New Delhi, India
+91 11 66233110


Peter Wesp
Japan TAS Power & Utilities Leader
Tokyo, Japan
+81 3 4582 6400


Bum Choong Kim
Korea TAS Power & Utilities Leader
Seoul, Korea
+82 23787 4107