BY Fraser Tennant
M&A activity throughout 2015 will yield continued growth for utilities and financial investors according to the latest Power and Transactions Trends report published by EY.
As well as predicting another robust year for the M&A transactional landscape, EY’s report – ‘Power transactions and trends: global power and utilities transactions review’ also takes a look back at 2014 – a pivotal year for the global power and utilities (P&U) sector.
EY expects M&A activity throughout 2015 to be shaped by the following criteria: (i) low power prices have made unregulated generation unprofitable for some diversified utilities - this, along with the recent price recovery, coupled with the resulting declining reserve margins in the near term in many regions, points to an active IPP market; (ii) large diversified utilities are streamlining operations by focusing on stable regulated assets, as well as consolidating positions through acquisitions in high-growth regions; (iii) in a bid to hedge against commodity price volatility, utilities are likely to shift some investment focus towards vertical integration by acquiring midstream and upstream assets; (iv) as more countries implement policies in support of renewable energy, this will lead to heightened M&A activity in this space across all regions; (v) the urgent need for increased levels of electrification will see emerging markets, such as Africa, Mexico, India, Chile and Brazil, present significant opportunities for global investors; and (vi) financial buyers, including pension funds, are increasingly investing in the P&U sector, particularly in infrastructure fund investments.
The EY report also projects that market reforms will drive activity in Japan, Mexico and Africa during 2015, attracting many of the world’s biggest power and utilities investors.
“In 2015, we expect to see Japan and Mexico grow further, and we are calling out Africa as the next area of growth, as governments alter structural arrangements to welcome new entrants,” said Matt Rennie, EY’s global TAS power & utilities leader. “Africa faces tremendous challenges and opportunities in its quest for greater levels of electrification, and, in turn, economic prosperity.
“As always, we expect consortia based entry strategies will best navigate local business and legislative regimes, a tactic which offers opportunities for both inbound and domestic utilities.”