Wordwide appetite for power sector M&A is rising, new reports find
An EY survey says 59% of power and utility CEOs expect to pursue an M&A deal this year
Power and utility executives’ appetite for pursuing mergers and acquisitions is at a seven year high, according to a new report from consulting firm EY.
The report, which also draws on the firm’s biannual Power & Utilities Capital Confidence Barometer, shows that 59% of power and utility executives responding to the survey said they expect to actively pursue an acquisition in the next 12 months, a 12% increase from the last survey. And 89% of the respondents said they expect their deal pipeline to increase or remain stable over the next 12 months.
The M&A environment in the first quarter of this year indicates “the trends established in 2016 endure,” said Matt Rennie, global power and utilities transactions leader at EY.
EY tallied a reported deal value of $44.5 billion in the first quarter, a seven-year high for first quarter activity.
Transmission and distribution and renewable energy assets backed by power purchase agreements dominated the first quarter, accounting for $35.6 billion, or 78%, of the quarter’s total.
The report noted that the “growth in deal value for renewables was higher than any other sector in Q1 2017, when compared with Q4 2016, and all other sectors declined in total deal value.”
The competition for those assets is also driving up prices. The average price-to-earnings multiples and enterprise value-to-EBIDA multiples for T&D and renewable assets are “trading at strong premiums,” the report noted.
In developed countries, overcapacity and low interest rates continued to drive investors to seek stable, secure returns, the report said, while for investors in developed countries the main drivers are the growth of electrification and the need for more infrastructure.
The focus on renewables was particularly strong in the Americas where the report shows that 18 deals for renewable energy assets accounted for $8.6 billion, or 41%, of the deal value in the first quarter.
And similar to an M&A report earlier this year from PwC, inbound investment dominated deal flow.
EY found that the top five Americas deals in the first quarter involved Canadian investment in the U.S. and three of those deals were in the renewables sector.
The largest deal of the quarter was Canadian utility AltaGas’ $6.3 billion acquisition of WGL Holdings of the U.S.
Investors are also showing a growing interest in disruptive technologies, EY says, citing Ormat Technologies’ deal to acquire battery storage company Viridity Energy for $35 million, Consolidated Edison’s deal to acquire Ross Solar for an undisclosed sum, Mitsui’s acquisition of the commercial and industrial division of SunEdison, and National Grid’s $100 million investment in Sunrun.
EY also expects to see an increasing focus on investments that add to system reliability as developed countries continue to add renewables, which will make flexible assets such as fast-ramping gas-fired plants more important.
Overall, the Americas represented the largest share of first quarter deal value. EY reports that $21 billion of deal value originated in the Americas and $15.1 billion in the Asia-Pacific region. Those two regions combined contributed 80% of the quarter's total M&A value. The report says that the Americas will likely to remain the top M&A destination as executives identified the U.S., Brazil and Canada among their top five targets for the next 12 months.
In addition to the renewables play, EY said its survey results show that 53% of power and utility executives cited growth in market share and moving into new geographies as key drivers for pursuing M&A.
The report cautioned that several factors could affect the overall outlook, namely, higher interest rates, a recovery of Europe’s power and utilities market, or significant shifts in the underlying economics of battery technology.
As yet, none of those preconditions have yet emerged, so EY expects “a continuation of strong activity for the remainder of 2017.” But that robust outlook was tempered in a blog post in which Rennie said, “It has never been more difficult to invest in assets in the power industry.”
That point was underscored by recent events when the Public Utility Commission of Texas rejected NextEra Energy’s $18.4 billion bid to acquire Oncor Electric Delivery.
The electricity market is more complicated than even that, Rennie said, citing the disruptive effects of higher levels of renewable energy penetration, greater consumer awareness and participation in their energy choices, and innovation that is eroding traditional business models. As those factors make power markets more complex and that increases the risk of unpredictable government interventions in market design, he said.
Rennie cited the results of EY’s survey that found two items tied for the top place in in the list of CEOs’ concerns. The CEOs listed disruption and government intervention into electricity markets as the biggest threats to their business.
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