New York, NY, Mar. 13, 2006 — The M&A market in the global electricity and gas industry is entering a new blockbuster deal era, says PricewaterhouseCoopers.
Following a record breaking year in 2005, due largely to the rise of super regional utilities and consolidation in Europe, the sector is set for further escalation in deal volumes and values this year, according to PricewaterhouseCoopers’ “Power Deals” report on M&A activity in the industry.
During 2005 new records were set for the number of deals, the total value of deals, the value of a single deal and the number of mega deals valued at over $10 billion. With 527 deals valued at a total of $196 billion and five deals each exceeding $10 billion, 2005 far out ran 2004’s high levels of activity, said a recent press release from PricewaterhouseCoopers.
“The electricity and gas M&A activity surpassed the exceptional momentum that had already built up and is continuing to gain speed in 2006,” said Manfred Wiegand, global utilities leader at PricewaterhouseCoopers. “We are seeing a new era of blockbuster deals. Companies are consolidating and extending their regional footprints to attain non-organic growth in a tight sector facing high fuel prices and security of supply concerns. We are also seeing greater involvement of financial players in the market with the rise of infrastructure funds creating a new asset class.”
European activity is fuelling the huge surge in total deal activity as utility companies move fast to consolidate in the EU in advance of the anticipated customer choice resulting from liberalized rules in 2007, says the report.
But, while the biggest surge came in Europe, total deal numbers and value also rose virtually across the board. There is a trend globally toward domestic consolidation, with domestic deals accounting for 71% of all deals in 2005, says the report. Global activity, however, is still notable with a growing breed of infrastructure funds building global portfolios of primarily network assets, the report stated.
“The run up to the 2007 full market opening in Europe will continue to feed consolidation momentum in the EU,” said Wiegand. “Around the globe, increased competition is driving companies to turn to M&A activities to deliver growth horizontally and vertically. High wholesale power, gas and carbon prices also are creating new platforms for deal activity, pushing up generation asset values and bolstering the rationale for deal prices. As we look ahead, we can expect to see greater integration of upstream and downstream entities and more moves by the mega-players. The attitude of the competition authorities will be critical to future deals.”
According to Power Deals 2005:
Total number of deals in 2005 rose 15% from the year before — up from 459 to 527. Total deal volume climbed from $123 billion to $196 billion, hitting a level nearly five times greater than that recorded in 2003. A minimum of $10 billion in deal value was the requirement to make the top five. All five mega deals, with total value of $78 billion, were consolidation moves through acquisition of complementary portfolios in core markets. Last year, only one deal topped the $10 billion mark.
Increased gas prices are leading to a greater focus on nuclear, clean coal and renewable assets. While the value of electricity deals increased 80% in 2005, the total value of gas deals decreased 20%.
Security and supply concerns are reinforcing the drive to diversify and bulk up in assets, particularly in Europe. In all territories, gas and carbon dioxide prices will play an important role in determining deal strategies.
Key regional markets according to the report:
* Europe — Power deals in Europe accounted for 58% of all targets and 44% of all bidders in the total worldwide power deals market in 2005.
The value of all deals for European electricity assets trebled (up 202%). The leap was even more dramatic for purely domestic deals where the value of European electricity assets targeted rose fourfold.
Average (mean) target electricity and gas deal size in Europe was also up by 111% from $258 million to $542 million.
Mark Hughes, European utilities leader, corporate finance and advisory services at PricewaterhouseCoopers, said, “European power deal activity has been intense over the last 12 months. European utilities are bulking up to meet the challenges of competition, rigorous investment requirements and the need to enhance purchasing power in a world thirsty for fuel. Looking ahead, the courtship of Russia and Europe presents some intriguing possibilities. The interdependency of Russian fuel sources and western European end markets, combined with the need for investment, point to a strong likelihood of key players striking deals to secure both supply and markets.”
* North America — Power deal activity in North America continued at very high levels in 2005, accounting for one-third of all power deals worldwide with the value of total North American M&A targets rising by 5.8% to $62 billion. Most of the activity was in electricity, although the total value of North American gas assets, targeted in domestic deals, more than doubled, up from $3.1 billion to $6.4 billion.
John McConomy, U.S. power & utilities transaction services leader at PricewaterhouseCoopers, observed, “With Wall Street expecting earnings-per-share growth of 5 to 6%, but organic growth expectations in most territories down around the 2% mark, it is not surprising that utility companies were hard on the acquisition trail having squeezed out most of their organic growth potential. Looking ahead, the power sector remains very fragmented with huge scope for consolidation. Despite the repeal of the Public Utility Holding Company Act, however, regulatory developments will continue to hold the key to the pace of future moves in the U.S. market.”
* Asia Pacific — The value of total deals for Asia Pacific power assets continued to grow in 2005 even after an exceptional rise in 2004. Total deal value rose to $17.2 billion in 2005, up from $15.1 billion in 2004 and $6.2 billion in 2003. The value of domestic electricity assets targeted in the region rose nearly three fold, from $4.2 billion to $11.3 billion with deal numbers nearly double their 2004 level.
Derek Kidley, Australasia energy and utilities leader for PricewaterhouseCoopers, commented, “The region has led the world with the emergence of Australian based infrastructure funds buying up power network assets across the globe. This trend is set to continue. Looking ahead, the climate for deals in the region remains positive with a number of factors maintaining momentum. Power utilities are hungry for gas to meet their huge peak energy needs during the hot summer air conditioning period. Many are looking beyond contracts to satisfy this need through asset plays. The region faces a huge investment challenge in both generation and networks to meet increasing energy demand.”