Small-cap deals to fuel M&A in power and utilities as acquisition appetite hits two-year high amid growing investor confidence

EY LLC, Kyiv, Ukraine, 
Wed, Dec 3, 2014

•                   Increase in P&U companies expecting to dodeals in the next 12 months

•                   Small cap deals to drive next M&A wave inP&U with focus on new geographies

•                   Bulging M&A pipeline; expectations forfurther expansion

•                   Deal activity in Q3 2014 outpaces 2013 with conditions ripe for moreM&A

London, Kyiv, 3 December 2014: Forty percent of power and utility (P&U) companiesanticipate pursuing acquisitions in the next 12 months — the highest number fortwo years, according to EY’s 11th biannual Power & Utilities Global Capital confidencebarometer, a survey of more than1,600 senior executives in more than 60 countries of which 91 were from theP&U companies. Executives in the P&U sector expect the M&A marketmomentum to accelerate further amid more robust market conditions and expandingdeal pipelines. 

Sustainedoptimism in the global economy, confidence in corporate earnings and greaterintent to pursue acquisitions have boosted the outlook for the M&A market.Positive sentiment about P&U M&A activity is backed by the strongmarket environment in the sector in the last six months. There have been 233deals with total disclosed value of US$97b in Q2 and Q3 2014, including 19deals above US$1b. 

MatthewRennie, EY’s Global Transactions Leader for Power & Utilities, says:

“Threekey trends are emerging as the drivers of P&U transaction activity.Firstly, in regions such as Africa and ASEAN, the continued focus onelectrification to provide a stimulus for economic growth is driving increasedinvestment activity. Secondly, in more mature markets such as Europe, weakenergy market conditions are continuing to drive large scale divestments asutilities seek to diversify and deleverage. Thirdly, many governments — whetherfor fiscal imperatives or as part of microeconomic reform programs — areincreasingly pursuing the divestment of state owned utility assets, for examplein Australia and Southern Europe.”

Accordingto the Barometer results, we can also expect a shift toward small-cap andmid-sized deals is not limited to specific geographies, as companies across theAmericas, Europe and Asia are acquiring wind and solar power assets. However,despite the sentiment favoring deals under US$250m, the conditions continue tobe ripe for large transactions as well. Market reform and privatizationinitiatives in countries such as Greece and Israel, continued divestment inEurope and consolidation in the US are expected to deliver large deals in 2015. 

Pipelinegrows further as climate provides ripe conditions for bullish deal intentions

AtUS$125b, the total deal value in the first nine months of 2014 already equals2013’s full-year deal value, according to EY’s Power transactions and trends Q32014 report. In addition, nearly two-thirds (63%) of P&U executives expectthe M&A pipeline to expand further over the next year — this is more thandouble the number expecting expansion six months ago. An accelerating M&Apipeline is the clearest indicator of future activity 

Afurther sign of improved deal climate sees a third (35%) of the Barometerrespondents having more than five deals in their pipelines — over double thenumber half a year ago.

Q32014 saw the highest third-quarter deal value (US$38.6b) since Q3 2010. Dealactivity in water and wastewater treatment rose significantly, led by China,with deal volume increasing 53% in the quarter globally. Renewables deal valuereached a three-year high of US$7.3b in Q3 2014, driven by the US, where recordwind capacity is under construction, which ensures the trend is likely to gaintraction. 

Utilitydivestments are behind a strong deals pipeline in the renewables sector, whereEurope and the US have historically dominated deal activity. However, newM&A hotspots are emerging, with Sub-Saharan Africa now firmly on investors’radar. 

Mr.Rennie notes: “As we move toward 2015, the attractiveness of stable andcontracted cash flows from both renewable and regulated businesses willcontinue to be the key force behind M&A in P&U. I expect the flow ofcapital to emerging nations to rise as utilities in developed markets look forgrowth and geographic expansion.”

Utilities’drive to add stable cash flows and governments’ desire to raise capital provideripe M&A conditions. 

WhileEurope and the Americas have historically been at the center of M&Aactivity in the P&U sector, the latest EY studies suggest emerging marketswill host more transactions in the future. For example, India is selling stakesin a number of state firms to cap the fiscal deficit. South Africa, Kenya andEthiopia are expected to emerge as the largest markets for renewables between2014 and 2016. Countries such as Nigeria, Morocco, Algeria, Israel, SaudiArabia and Qatar are anticipated to host more deal activity going forward. AndLatin America is expected to see major transactions amid reforms in Mexico. 

Major factors behind bolstered M&A sentimentin the P&U sector:

·        Big-ticketprivatizations and mergers make Europe an attractive destination for foreigninvestors

·        Chineseinvestors seize European sales opportunities and remain front-runners toacquire other prized assets

·        USgeneration deal activity continues to gather pace, led by merchant generators

·        Renewabledeal activity surges on the back of heightened interest in the US

·        Growingconfidence in global economy supports bullish M&A sentiment 

Morethan half (51%) of the P&U executives expect the global economy to remainstable in the next 12 months, according to the Barometer. All (100%)respondents from Brazil, China and India believe the global economy isimproving. Half of executives (50%) in the P&U sector expect to create newjobs — 20% more than six months ago. However, geopolitical instability becamethe greatest risk factor for P&U companies. 

Mr.Rennie adds: “The P&U sector is transforming and companies are realigningtheir businesses, optimizing their asset portfolios and expanding into alliedservices to protect market position and target growth. However, in response tochanging business environment, cost reduction and operational efficiency isback at the top of the agenda for P&U companies.”

Thevaluation gap remains stable, with very little discrepancy between buyers’ andsellers’ expectations on asset prices — boosting deal-making in the near term. 

Accessto new markets and products will drive M&A activity in the P&U sector,with focus firmly remaining on core business.

Sentimentis shifting toward emerging markets, with India, China and Brazil being amongthe top five investment destinations.

Mr.Rennie concludes: “Globally, deal activity in the P&U sector looks set toreach new heights. While big-ticket megadeals are likely to continue, small-capand mid-market deals look set to take center stage.” 

To download the reports and historical data,visit: www.ey.com/PTT and www.ey.com/powerandutilities/CCB. 

About Power Transactions and Trends data

The analysis and perspectives in Powertransactions and trends are based on global financial releases and Mergermarketdata, as well as global engagements conducted by EY member firms from 2012 to2014. 

“Power and utilities” covers electricitygeneration, networks and retail, gas networks and retail, water wholesale,networks and retail organizations, and renewable energy companies. Dealactivity and valuations may fluctuate slightly based on the final date of datacollection and analysis by EY. 

About EY’s Capital Confidence Barometer

The EY Capitalconfidence barometer is a survey of 1600 senior executives from largecompanies around the world and across industry sectors. The objective of the Barometer is to gauge corporateconfidence in the economic outlook, to understand boardroom priorities in thenext 12 months, and to identify the emerging capital practices that willdistinguish those companies that will build competitive advantage as the globaleconomy continues to evolve. This is the 11th biannual Barometer in the series, which began in November 2009. 

About EY’s Global Power & Utilities Center

In a world of uncertainty, changing regulatoryframeworks and environmental challenges, utility companies need to maintain asecure and reliable supply, while anticipating change and reacting to itquickly. EY’s Global Power & Utilities Center brings together a worldwideteam of professionals to help you succeed — a team with deep technicalexperience in providing assurance, tax, transaction and advisory services. TheCenter works to anticipate market trends, identify the implications and developpoints of view on relevant sector issues. Ultimately it enables us to help youmeet your goals and compete more effectively. 

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