BY Fraser Tennant
Mergers and acquisitions (M&A) activity within the power and utilities (P&U) sector propelled Q1 deal value and volumes to a four-year high, according to a new EY report.
The first quarter data showcased in EY’s ‘Power transactions and trends 2015’ reveals that total deal value reached US$29.7bn, deal value in Europe (the leading Q1 M&A destination) was US$11.4bn, and the total Q1 deal volume was 101 – all pointers to yet another strong year for M&A in the P&U sector.
The demonstrably burgeoning level of M&A activity seen across the globe is partly due, says EY, to energy reforms and unbundling (ERU) – an emerging trend involving governments opening up their energy sectors to competition. Indeed, ERU has recently been introduced in China and Japan, with both territories initiating reforms designed to break the dominance of state-owned monopolies.
“We expect to see more deals involving consortiums as utilities and financial investors recognise the opportunities for collaboration," confirms Matt Rennie, EY’s global TAS power & utilities leader. “Conventional P&U companies are expected to focus on new areas of growth such as evolving technologies, energy services and fuel supplies.”
The EY report also states that: (i) during Q1, US utilities turned to consolidation to meet the challenges of a stringent regulatory environment, weak earnings growth and declining returns on equity; (ii) in Europe, utilities continued to sell assets – mostly to financial investors – as they prioritised core business; (iii) Asia-Pacific deal activity was dominated by Chinese utilities, which are looking to consolidate to secure greater market share in the domestic market; and (iv) in Africa, a lack of local funding sources created opportunities for foreign investors to take a prominent role in financing power projects, as governments made moves to ease risks for investors.
“As the year progresses, we expect to see a rise in the number of deals involving consortiums as utilities and financial investors recognise the opportunities for collaboration," continues Mr Rennie. “Given a weak growth outlook in key regions, conventional P&U companies will focus on new areas of growth such as evolving technologies, energy services and fuel supplies.”