Forty percent of power and utility (P&U) companies anticipate pursuing acquisitions in the next 12 months the highest number for two years, according to EY's survey. Executives in the P&U sector expect the M&A market momentum to accelerate further amid more robust market conditions and expanding deal pipelines.
Sustained optimism in the global economy, confidence in corporate earnings and greater intent to pursue acquisitions has boosted the outlook for the M&A market. Positive sentiment about P&U M&A activity is backed by the strong market environment in the sector in the last six months. There have been 233 deals with total disclosed value of USD 97 billion in Q2 and Q3 2014, including 19 deals above USD 1 billion.
Matthew Rennie, EY's Global Transactions Leader for Power & Utilities, said, "Three key trends are emerging as the drivers of P&U transaction activity. Firstly, in regions such as Africa and ASEAN, the continued focus on electrification to provide a stimulus for economic growth is driving increased investment activity. Secondly, in more mature markets such as Europe, weak energy market conditions are continuing to drive large scale divestments as utilities seek to diversify and deleverage. Thirdly, many governments whether for fiscal imperatives or as part of microeconomic reform programs are increasingly pursuing the divestment of state owned utility assets, for example in Australia and Southern Europe."
According to the Barometer results, we can also expect a shift toward small-cap and mid-sized deals is not limited to specific geographies, as companies across the Americas, Europe and Asia are acquiring wind and solar power assets. However, despite the sentiment favoring deals under USD 250 million, the conditions continue to be ripe for large transactions as well. Market reform and privatization initiatives in countries such as Greece and Israel, continued divestment in Europe and consolidation in the US are expected to deliver large deals in 2015.
At USD 125 billion, the total deal value in the first nine months of 2014 already equals 2013's full-year deal value, according to EY's Power transactions and trends Q3 2014 report. In addition, nearly two-thirds (63%) of P&U executives expect the M&A pipeline to expand further over the next year this is more than double the number expecting expansion six months ago. An accelerating M&A pipeline is the clearest indicator of future activity.
A further sign of improved deal climate sees a third (35%) of the Barometer respondents having more than five deals in their pipelines over double the number half a year ago.
Q3 2014 saw the highest third-quarter deal value (USD 38.6 billion) since Q3 2010. Deal activity in water and wastewater treatment rose significantly, led by China, with deal volume increasing 53% in the quarter globally. Renewables deal value reached a three-year high of USD 7.3 billion in Q3 2014, driven by the US, where record wind capacity is under construction, which ensures the trend is likely to gain traction.
Utility divestments are behind a strong deals pipeline in the renewables sector, where Europe and the US have historically dominated deal activity. However, new M&A hotspots are emerging, with Sub-Saharan Africa now firmly on investors' radar.
Rennie said, "As we move toward 2015, the attractiveness of stable and contracted cash flows from both renewable and regulated businesses will continue to be the key force behind M&A in P&U. I expect the flow of capital to emerging nations to rise as utilities in developed markets look for growth and geographic expansion."
