Matthew Rennie, EY Global Transactions Power & Utilities Leader, says: “The increasing deal volume reflects the confidence our global P&U network is hearing from clients. Our recent capital confidence barometer survey indicates that confidence among power and utility executives is at its highest point in two years, with 67% of those surveyed believing the global economy is improving compared to 47% six months ago. This positive sentiment is evident in both the increasing number of billion-dollar plus transactions and strengthening volumes.”
Utilities looking for new avenues of growth
One of the main drivers of the increased deal volume during the quarter has been the continued market reform taking place globally, with privatizations and deregulation liberalizing markets in Russia, Australia, Japan, Nigeria, New Zealand, Turkey and Greece.
Political intervention, commodity price volatility, high-cost regulatory frameworks and unpredictableaccess to capital have prompted utilities to explore opportunities upstream and downstream in the supply chain in order to consolidate and secure revenues. During the quarter, a number of European utilities acquired energy efficiency and services businesses – the largest of which was French-based Schneider’s acquisition of Invensys Plc. for US$4.6b.
Rennie comments: “We are seeing changing fundamentals in a number of markets around the world prompting utilities to reevaluate traditional models, narrow their focus on core operations, and optimize asset portfolios through non-core divestments and acquisitions of supporting vertical and horizontal services. While 2012 saw several utilities integrating upstream, for example through acquisitions of coal mines and gas production assets to consolidate fuel supply, we see downstream integration as a key focus going forward.”
Opportunistic generation deals in the US, while Europe’s wholesale market stalls
After a strong quarter on the back of low interest rates and a continued appetite for good assets, the US market is likely to face growing pressures as interest rates rise, regulators push to cut equity returns and unregulated businesses struggle with low demand and wholesale prices. Despite a slight recovery in natural gas prices, and the retirement of some coal-fired plants, wholesale supply and demand dynamics continue to drive low forward power price curves across the market.
Within Europe, the wholesale market continues to face subdued demand and low prices, resulting in utilities reducing capacity and adopting new strategies for growth. However, when looking ahead, it is anticipated a number of large divestments in 2014 will ensure Europe remains a major contributor to global deal activity.
Emerging markets remain a key focus for investment and growth
Investing in emerging markets remains a core strategy for the sector. Brazil, India, Canada, South Africa and Chile are the world’s top five energy investment destinations as many utilities begin to recognize that their core geographies may no longer be their dominant profit center.
Looking ahead to what opportunities and challenges the sector holds, Rennie concludes: “We predict that three themes will dominate medium-term transactions: the continued trend to re-balance portfolios to secure revenues; market reform initiatives; and the continued drive for electrification in emerging markets. Despite market uncertainty, growth remains the key focus for P&U executives globally, with 50% indicating that growth is their number one focus. With growth in the emerging markets remaining strong, we expect to see utilities continue to de-leverage away from domestic markets in 2014.”
