Wave of global mega-utility deals on the horizon, says KPMG report

HOUSTON, TX., May 23, 2007 — A report launched today by KPMG International reveals that the unprecedented spate of global power industry transactions is likely to continue.

Some of the mid to large utility players look set to pursue mega-deals to shore up their position in the highly competitive market over the coming year. KPMG predicts that the intense activity which characterized 2006 is unlikely to decline any time soon, although executives concerns over the U.S. regulatory environment suggest that the rate of deals here will be more conservative than elsewhere in the global marketplace.

The “Powering Ahead: Mergers and Acquisitions in the Global Power and Utilities Industry” report — which surveyed 40 senior executives from some of the largest global power and utilities companies — reveals that the appetite and expectation for deal flow in industrialized markets remains high. Key findings include:

* Eighty-two percent of respondents expect further international consolidation to occur in the next three years;

* Sixty percent assert that their businesses are already actively seeking acquisitions at this moment;

* Nearly half, 47 percent, have acquired another utility in the past three years; and,

* More than half, 53 percent, of respondents say the main goal of M&A is increasing market share, with other drivers cited being acquisition of new products and services, entering new geographic areas and improving economies of scale.

Despite some of the largest sector transactions to date having been completed over the last 12 months, respondents agree that cross-border consolidation will continue as deregulation takes hold in Europe, leading to the first mega-utilities. In the U.S. utilities indicated they are looking for further efficiency gains in their domestic business. China, India, Australia and Russia were cited by respondents as offering the best prospects for growth, with Australia also cited as an emerging investor in other countries.

“Utility consolidation is a growing global trend and recent headlines across all key markets suggest that it is boom time for the sector,” said Tony Bohnert, transaction services partner for KPMG LLP’s Energy and Natural Resources practice. “In the U.S., with regulation in the hands of state officials, efforts to merge utilities may remain impeded. However, the U.S. participants in KPMG’s report suggest that current market fragmentation will ultimately create potential for deals to progress and expect two or three more dominant U.S. utilities companies to merge in the coming years.”

The survey shows that incremental growth remains a cornerstone of strategy, with 65 percent of respondents expecting organic growth to be more important to their businesses than growth by acquisition. Rapid economic growth in populous countries, notably China and India, is also expected to create organic growth opportunities.

When asked about the drivers behind increased M&A activity, half of the respondents cited competition from larger consolidated players as a major impetus while 48 percent noted a drive for greater cost efficiencies. Looking ahead, concerns about energy security and climate change — in addition to incentives from governments to bolster investment in renewable energy sources — are also expected to promote growing interest from utilities in wind power and other renewable energy assets.

Bohnert commented, “Intense interest in the renewables sector has prompted speculation that bidders are paying too much. It has certainly become more common for acquirers to pay a premium in return for exclusivity but the value of investing in renewables should not be underestimated. Utilities need to be quick out of the blocks to gain a foothold in the market before their competitors. Reaching an agreed deal without fierce competition is very rare.”

Europe — breeding ground for super-giants
The KPMG report highlights that the full deregulation of the EU energy market on July 1, 2007, will help producers and distributors to compete freely across national borders, threatening the lock which local incumbents have on domestic markets, and forcing European utilities to build regional powerhouses to withstand incursions into their home markets. Unlike in the U.S., utilities in Europe are already consolidated at the national level. As a result, the current wave of cross-border M&A could create super-giants.

Asia Pacific
The report suggests that rapid economic growth is creating large organic growth opportunities in countries such as India and China. Market entry and expansion strategies, together with funding requirements, are also driving M&A activity in these markets. Looking ahead many of the fundamentals for continuing high levels of M&A activity in the power and utilities sector remain in place, with strong demand for new investment, high investor appetite and further government reorganization leading to privatization opportunities.


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