M&A activity in 2015 to yield continued growth for utilities and financial investors

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.”

Report: Power transactions and trends: global power and utilities transactions review

Over-regulation and cyber risk top list of banking & capital markets CEO concerns

BY Fraser Tennant

Over-regulation and cyber risk are the two major threats to banking & capital markets (BCM), according to a new PwC report 'Achieving Success While Managing Disruption'.

The report, which showcases the views of 175 BCM CEOs across 54 countries, contends that over-regulation concerns have increased from 80 percent in 2014 to 89 percent in 2015 with CEOs particularly fearful over the impact of regulatory change.

“The ability to meet current and future regulation is hampered by lingering uncertainty over regulatory details and the potential for reactive and piecemeal implementation,” said Kevin Burrowes, PwC’s UK financial services leader. “It is vital for organisations to develop a proactive approach to regulation, headed by a regulatory leader responsible for liaising with regulators, assessing the strategic impact and co-ordinating the response.”

In terms of the risk of cyber attack, 79 percent of CEOs consider this to be likely and a potential barrier to business growth, although 92 percent still felt optimistic as to the prospects for growth of their own organisations.

Further survey findings include: (i) 86 percent of BCM CEOs recognise the importance of the CEO being the champion of digital technologies in helping to make the most of their bank’s digital investments; (ii) 93 percent of BCM CEOs see mobile technologies as being critical; (iii) 89 percent view data mining and analysis as important not only to gaining a better understanding of customer needs, but also in driving operational efficiency and effectiveness throughout the organisation; (iv) more than 40 percent of BCM CEOs see joint ventures, strategic alliances and informal collaborations as an opportunity to strengthen innovation and gain access to new customers and new/emerging technologies; and (v) 63 percent of BCM CEOs have a strategy to broaden talent diversity and inclusiveness or plan to promote one.

Report: A marketplace without boundaries?: Responding to disruption

France pushes through economic reform bill

BY Richard Summerfield     

Facing continued stagnation in the national economy, French prime minister Manuel Valls was forced to take decisive action last week. Utilising emergency constitutional powers, he pushed through an omnibus bill which will implement a number of labour market reforms. Though the prime minister felt that his bill would likely pass a parliamentary vote, he was unwilling to leave it to chance.

The reform bill is made up various measures which appear quite inconsequential in isolation, but their sum, the government hopes, will reinvigorate the national economy. The bill proposes to extend shopping hours on a Sunday, sell between €5bn and €10bn of state shareholdings, liberalise the country’s inter-city coach industry, and deregulate a number of professions. Should the reforms have their intended purpose, they could prove vital for the economy, which is entering its third year of stagnation and near zero growth.

However, implementation of the so-called ‘Loi Macron’ bill (named for French economy minister Emmanuel Macron) by emergency decree required the government to pass a vote of no confidence. The government succeeded by just 55 votes. The Macron bill has encountered opposition from both the left and right wings of the French political spectrum. A number of government ministers, suggesting the reforms were too pro-business, had announced they would move to block the bill if it went to a vote. Despite some political reluctance, recent polls point to strong public support for the reforms.

The decision to bypass regular parliamentary procedure has served to further emphasise the commitment of the Valls/Hollande government to modernisation. "There was probably a majority for this bill but it was not sure so I decided to take no chances - I couldn't risk seeing a plan so crucial to our economy be rejected," said Mr Valls. "Nothing will make us give up, nothing will make us retreat - the national interest of the French people requires it."

News: French govt to pass controversial economic reform bill by decree

Chinese FDI jumps in January

BY Richard Summerfield

According to the United Nations economic agency UNCTAD, China overtook the US in 2014 to become the most popular destination for foreign direct investment (FDI). Despite this, for many commentators, last year was disappointing for Chinese inbound FDI, which increased by only 1.7 percent to $119.6bn - the lowest growth since 2012.

As economic growth slows, more and more Chinese firms have begun to look overseas for viable investment opportunities. Accordingly, Chinese outgoing investment appears set to overtake inbound FDI in the coming years.

But there is hope that 2015 may prove more successful in terms of FDI. In January, FDI into China increased by 29.4 percent compared to the same period a year ago, recording its strongest monthly pace in over four years.  China attracted $13.92bn, up from $13.32bn in December 2014. The top 10 investors by region were led by Hong Kong, South Korea, Singapore, Taiwan and Japan, which accounted for 96.5 percent of total FDI into the country.

According to the data supplied by China’s commerce ministry, the services industry was the primary beneficiary of capital inflows. FDI into the services sector climbed to $9.2bn - a 45.1 percent increase from a year earlier and around 66 percent of total FDI. By contrast, manufacturing activity in the country is slowing down.

The commerce ministry, while encouraged by the influx of FDI already recorded in 2015, says it's still too early to suggest that China will remain the leading FDI target this year.

Some analysts have urged caution, noting that January alone may not be the strongest indicator of the likely annual FDI intake. Much of the scepticism is based on the strong seasonal distortions which have been caused by the timing of the Lunar New Year holidays, which began on 31 January 2014 but start on 13 February this year.

News: China January FDI grows at strongest pace in four years

“Challenging” Latin American investment environment highlights private equity value

BY Fraser Tennant

Latin American economies experienced a “challenging” 2014 with decreasing foreign demand, falling commodities prices and a reversal of asset flows back to developed markets contributing to an economic slowdown that significantly impacted the region’s private equity activity.

Data presented and analysed in ‘Private equity roundup for Latin America’ - the latest in EY’s series of private equity reports examining fundraising, investment activity and exits across a range of developing economies – shows that although total deal value increased marginally to US$4.3bn in 2014, the number of PE transactions actually fell by 18 percent to 76 (101 deals totalling US$4.5bn took place in 2012).

Despite these figures, the report does not suggest that investors are looking to withdraw from the region. On the contrary, many investors appear to be increasing their commitments with fundraising increasing by 73 percent over 2013 to US$9.0bn with nearly 60 firms in the region said to be actively fundraising.

“It is a maxim of private equity that many of the best deals are made during the worst of times," observe the authors of the ‘Private equity roundup for Latin America’ report. “While the current downturn in certain sectors of Latin America’s economy hardly qualifies as the 'worst of times,' clear dislocations continue to make the operating environment increasingly challenging. Despite this, the industry has yet to see an exodus of capital. Indeed, fundraising figures and LP surveys confirm that investors continue to fund new vehicles and are maintaining or increasing their commitments.”

Although overall growth in Latin America has slowed, there are significant differences between individual countries – Mexico and Brazil in particular, the region’s two largest economies. The IMF expects Mexico’s economy to grow by 3.5 percent in 2015 and Brazil’s by 1.4 percent.

In terms of regulatory impacts, Latin America still has a long way to go, such as dealing with security issues and corruption, but structural reform programs are underway.

For Latin America the current environment is a challenging. However, the EY report does highlight the “compelling” value of private equity, offering as it does the “operational expertise and financial discipline to help savvy entrepreneurs weather macro headwinds".

Overall, investment is encouraged and positive outcomes are expected in Latin America.

Report: Private equity roundup Latin America