Q2 Global Power and Utility Deal Value Up 84%
In a sign of improved deal-making conditions Q2 2012 saw global power and utility deal value rise from US$26.06b to US$47.9b (84%) and deal volume increase 20% in comparison with Q1 2012, according to Ernst & Young.
The quarter was dominated by a number of high-profile transactions, including the Tokyo Electric Power Company (TEPCO) transaction (US$12.6b) and the finalization of the EDF/Edison deal (US$7.6b).
Joseph Fontana, Ernst & Young Global Transaction Advisory Power and Utilities Leader, says: “The TEPCO transaction is an example of the significant increase in Asia-Pacific deal activity compared to the previous quarter. Deal volume increased by 140% and deal value escalated from US$3.5b in Q1 2012 to US$20.2b in Q2 2012, contributing to 3 of the top 10 deals in the quarter.”
Financial buyers re-entering the billion-dollar club
Financial buyers came to the fore in Q2 2012, accounting for 55% of the total deal value of US$47.9b and 5 of the top 10 deals of the quarter. The divestment programs undertaken by utilities have created opportunities for financial buyers to invest in assets with predictable cash flows, which are particularly prized in the current environment.
During Q2 2012, the average deal value increased 35% over the previous quarter and 72% over the previous year, to stand at US$855m. This was as a result of a large number of transactions pushing through the billion dollar plus mark, reflecting increasing confidence in large transactions.
A significant surge in average deal size, driven by big-ticket financial deals, created a two-year high in financial deal value, even though volumes remained flat. With continued slow economic recovery, corporate deal value declined by 4% in comparison with Q1 2012, although volume increased 22%.
Renewables position weakens
Renewables continue to struggle with subsidy uncertainty and the decline in the renewables’ deal value continued in Q2 2012, reducing to almost half of its Q1 2012 value. The decline was driven by the American and European regions, which are facing limited support for renewable energy. Renewables are also struggling to compete over cheap alternate fuels such as coal (Europe) and gas (US).
Europe remained the center for clean energy deals, hosting 16 out of the total 26 deals and contributing 50% to the deal value. In the light of an increasing debt burden and a weak macroeconomic outlook, the financial and political support for renewable energy in Europe is dwindling.
The subsidy cuts have left utilities and developers in an uncertain position where they have been compelled to move out of their home territory and seek opportunities in growth markets such as Asia, Latin America and South Africa.
Transaction volume and value
When looking at the deal activity by type, generation declined, while transmission and distribution witnessed a significant surge in deal activity in Q2 2012, driven by European network assets divestments. Generation M&A deal volume increased 27% over the previous quarter; however, deal value declined by 66.7% due to a lack of big-ticket deals compared to Q1 2012.
Transmission and distribution M&A value surged close to four times its previous quarter value as Europe emerged as the primary driver, contributing more than 65% to the total value. With the EU mandating unbundling requirements, utilities have started divesting network assets.
Asia-Pacific witnessed a sudden surge in deal activity, in tandem with divestment programs of European utilities. The region hosted the maximum number of generation deals (10) reflecting the broad trend of focus on securing fuel supplies and access to advanced renewable technology.
Q2 2012 witnessed Europe’s continued dominance over global deal volume and value primarily driven by debt reduction programs of large European utilities. By hosting 12 of the total 17 financial deals in the quarter, Europe reflected the long-term trend of the growing number of non-utility buyers, such as sovereign and pension funds.
The Americas deal environment remained weak with utilities holding their M&A decisions due to changing generation mix dynamics.
Bullish outlook for remainder of 2012
Most analysts agree that the majority of coal-to-gas transition in the US is largely complete and despite the attractive current economics, utilities are wary of becoming over-reliant on gas due to its inherent volatility.
European M&A activity will continue to be robust, driven by company divestments and government privatization programs. Asian investors are in the lead position for these divestment programs and general opportunistic acquisitions, as China focuses heavily on geographic expansion and Japan looks to secure fuel supply and technology.
For the remainder of 2012, Fontana summarizes, “The second half of 2012 is looking promising for deal-makers, as utilities continue to rationalize their portfolios. With divestments here to stay, Asian and financial investors will continue to be the front runners for prized assets. Deal activity in the emerging economies of Brazil and Argentina is expected to move up, while we expect Canadian investors will continue to eye US utilities.”