Utilities Spur M&A In Advanced Metering

By Joseph S. Mowery, Stephens Inc.

The wait and see approach of the past is over. Utilities are broadly embracing advanced metering technologies/infrastructure (AMI), emboldened by the success of pilot programs and high-profile installations. The attraction is simple: AMI offers utilities a solution to regulatory standards, customer service demands, increasing cost pressures and strained infrastructure.

As the industry gains strength, established AMI vendors are encountering fierce bidding for large utility contracts. To effectively compete, vendors are expanding their product offerings through acquisitions and internal developments. In 2006-2007, expect to see plenty of transactions unfold, as vendors attempt to gain leverage and transform into providers of more product offerings to utilities.

Utilities Clamor For AMI

AMI viability has been repeatedly proven, as myriad large utilities roll out the technology. Among the high-profile projects are PPL Corp., Pacific Gas & Electric Corp., San Diego Gas & Electric Co., Colorado Springs Utilities, City of Seattle, City of Geneseo, Ill., The Salt River Project (Arizona), Manitoba Hydro in Canada, Integral Energy in Australia, and the list goes on.

Many were prodded into action by the Energy Policy Act of 2005, which sets out requirements for utilities to evaluate smart and advanced metering, as well as time-of-use and demand response capabilities. This act likely will lead utilities to implement or upgrade current technologies. In addition, recent power outages, hurricanes and volatile energy prices highlighted the need for a more dynamic grid infrastructure. These issues put a premium on peak-shaving options-such as demand-response metering-as alternatives to burning costly natural gas in peak-load units.

To implement AMI, utilities demand extensive system capabilities: quality meter data for billing; meter data management, which organizes meter data to leverage benefits of advanced capabilities; fixed network systems; and two-way systems capable of advanced applications like outage management, load control, revenue assurance and system monitoring.

However, few AMI vendors actually have all of these features imbedded in their current offerings. As a result, vendors are looking for acquisitions to fill the need-relying on the age-old motto that it is often easier to buy than build. It’s a trend utility meter managers will want to stay on top of as they seek the right technology to implement in their service territories.

Recent Acquisitions

Electric vendors, including Itron Inc., ESCO Technologies Inc. (via its DCSI subsidiary) and Cellnet Technology Inc., are frequent winners of automated meter reading contracts, with a significant number of utilities going directly to them. In the past few years, Itron has completed several acquisitions, most notably acquiring Schlumberger Electricity Metering Inc., an electricity measurement and solid state metering business. With a strong balance sheet and stated growth by acquisition strategy, it would be no surprise to see Itron continue to be a consolidation leader.

ESCO has also stepped up with two recent acquisitions, including the purchase of Hexagram Inc. in February 2006. Hexagram has an RF-based fixed-network product for the water/gas AMR market, which will likely complement DCSI’s leading power line carrier based offering to the electric market.

Private equity firms, like GFI Energy Ventures LLC, Bayard Group and The Jordan Company LP, have also been making inroads in the AMI sector. GFI was an early player with its investments in energy software companies Caminus Corp. and LineSoft Corp. (sold to SunGard Data Systems Inc. and Itron respectively a few years ago), as well as Power Measurement Inc., a leader in the area of intelligent metering and controls, which was sold to Schneider Electric in 2005. Most recently, GFI sold Cannon Technologies Inc., a strong player in PLC AMR and demand response, to Cooper Power Systems Inc.

Bayard’s most notable transactions include the October 2004 purchase of Landis+Gyr Inc., the global metering company headquartered in Switzerland, and then in May 2006, Bayard purchased Hunt Technologies Inc., a leading vendor of PLC-based AMR technology, which quickly led to an enhanced strategic relationship between the two Bayard portfolio companies.

The Jordan Company acquired Sensus Metering Systems in late 2003. Sensus has long been a leader among suppliers of water meter solutions. Then, in June 2006, Sensus acquired Advanced Metering Data Systems LLC, which is an up-and-coming provider of RF fixed-network solutions and is expected to bolster Sensus’ presence in the electric and gas markets.

Established Vendors Face Competition

Further driving this merger and acquisition activity is the threat of other fast-growing players and new market entrants. For example, Cellnet, owned by GTCR Golder Rauner LLC, is a leading provider of fixed-network data communication systems and automation solutions to the gas, water and electric utility industries. Cellnet has been awarded several high-profile contracts of late, including a recent win from the City of Seattle and was also named recipient of the 2006 Frost & Sullivan technology innovation award for the AMI/automated meter reading market.

In the water metering arena, Neptune Technology Group Inc. (owned by Roper Industries Inc.) and Badger Meter Inc. are leaders. Neptune is often the partner of choice for others in the AMI industry looking to expand their product offerings via strategic alliances. Badger recently reported record quarterly revenues and is one of Forbes’ “200 Best Small Companies.” While Cellnet, Neptune and Badger have not been active lately in M&A, their successes are certainly being noticed across the industry. Each has the wherewithal to also participate in the industry consolidation, should they desire to expand their internal product offerings.

“Expect competition for AMI acquisitions to heat up in the coming year.”

Established AMI vendors must now also compete with up-and-coming players that are focused on “smart grid” technologies. For example, CURRENT Communications Group LLC recently announced an agreement to transform TXU Electric Delivery’s power distribution network into the nation’s first broadband-enabled smart grid. CURRENT will design, build and operate the broadband over power lines (BPL) network covering the majority of the TXU Electric Delivery service area. Current is backed by Liberty Associated Partners LP, EnerTech Capital and other well-known strategic investors such as Goldman Sachs Group Inc., Google Inc. and The Hearst Corporation. The company’s success with its BPL roll out is most certainly being monitored closely by the industry.

Other companies to keep an eye on include SmartSynch, which has sold more than 90,000 wireless advanced meters at more than 50 major utilities and distribution companies. Backed by leading energy tech VC firms, SmartSynch’s core product, the SmartMeter System, facilitates real-time acquisition of critical usage and rate data from electricity meters via public wireless networks and the Internet.

Another rising star is Comverge Inc., a leading demand response company with innovative solutions, including its proprietary Virtual Peaking Capacity program, aimed at reducing peak power costs and enhancing grid reliability. Comverge is also backed by leading energy tech VC firms, as well as recent strategic investor, Air Products.

The Future

As the above referenced and other up-and-coming “smart grid” competitors infiltrate the AMI market, traditional metering technology vendors are taking notice. As competition grows for market share, many vendors may feel compelled to pursue both vertical and horizontal acquisitions to meet utilities’ demands.

To the extent that acquisitions are not viable, expect to see a growing number of strategic relationships established among the various industry players. In the past year, a number of companies have announced alliances of one form or another, including:

  • Neptune with each of Hexagram, Landis + Gyr and Itron,
  • Cooper and Sensus,
  • Cellnet and Comverge, and
  • Itron and Cannon.

Smaller vendors may be tempted to sell, as larger players covet their technology and valuations appear attractive. Heightened utility usage, in combination with healthy M&A trends among top AMI vendors, has already driven valuations in the sector to levels not seen in years. Expect competition for AMI acquisitions to heat up in the coming year; and don’t be surprised to see increased IPO activity, as investors are clearly looking for additional quality opportunities to ride the AMI wave.

Joseph S. Mowery is a managing director at Stephens Inc., where he specializes in electrical equipment/energy technology investment banking. Stephens Inc. is a full-service investment banking firm located in Little Rock, Ark., with offices across the country. For further information, contact Mr. Mowery at 501-377-8266 or via e-mail at jmowery@stephens.com.

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