Europe

US dominates global M&A, but who is waiting in the wings?

Issue 3 and Volume 20.

This month finally saw the completion of the long-running merger between Exelon Corporation, America’s biggest nuclear power operator, and Constellation Energy Group. In the PricewaterhouseCooper’s (PwC) latest report that analyses merger and acquisition (M&A) activity in the global power utilities sector, this $11.2 billion deal ranked third largest. For our cover story, we pick out the key findings of PwC’s Power Deals report.

Traditionally, Europe and the US have been the dominant influence on M&A activity; this, at least for the latter, holds true. Last year, the value of North American deals more than doubled compared to 2010 to hit close to $108 billion, with US companies leading the charge. Europe, in contrast, saw the value of its M&A deals fall a massive 43 per cent, barely reaching $40 billion; similar to the values seen back in 2009 at the height of the credit crunch.

Undoubtedly the continuing crisis in the eurozone will complicate the dealmaking environment this year, and PwC believes that whether M&A activity picks up in Europe “will rest on the extent to which economic growth signals can provide the confidence to support Eurozone strategies”.

The report also highlights the growing influence of Asia-Pacific investors, in particular Chinese companies which are stepping up a gear in their ‘go abroad’ strategies. Another emerging trend highlighted in the report is the growing interest in rapidly developing power markets such as in Brazil.

Last year saw China’s Three Gorges acquire a sizable stake in Energias de Portugal, which has an extensive generation and distribution presence in Brazil, while German utility E.ON confirmed it was taking 10 per cent in MPX Energia, Brazil’s leading power generation company.

Although PwC believes that the “underlying fundamentals” for a return to the deal value highs of 2006–07 remain in place, “confidence in the wider economic outlook will be pivotal” to whether or not this is achieved this year. For a complete picture of the dealmaking that was conducted in the global power utilities sector last year and forecasts for 2012, please read Kelvin Ross’s comprehensive roundup on p.18.

Another country that appears to be actively looking outside its borders is Russia. This month, gas giant Gazprom announced it was planning to jointly invest in gas fired power plants in northwest Europe, with Danish utility Dong Energy, as part of an effort to move into new markets, while Inter RAO UES, one of Russia’s biggest power companies confirmed it is seeking to acquire power plants in both Europe and Turkey. It also recently signed a 25-year contract to supply close to 100 billion kWh of electricity to China.

Russia’s trend of exploring new markets outside of its borders does beg the question why, when you consider the size of Russia and its desperate need for new generation capacity and the modernisation of its existing assets, much of which is close to collapse.

I have recently returned from our Russia Power Conference and Exhibition, which took place on 5–7 March in Moscow, and some of the potential reasons behind this shift were highlighted during the conference. It is well documented how Russia’s conventional electricity sector has transformed itself almost beyond recognition in recent years – from a state-owned entity into a liberalised industrial sector subject to market forces. Clearly this has created a lot of opportunities but equally as many challenges.

Topping the list of power generators’ concerns is the lack of power tariff reform and its impact on their potential return on investment. As prime minister, Vladimir Putin was reticent to address tariff reform, and now that he is once again president the power industry has little confidence that he will address this highly divisive issue. Without a realistic tariff rise generators – both domestic and foreign – say investment in new capacity and, arguably more important, the modernisation of existing power assets, is uneconomical.

As Putin beds down in his ‘new, old’ role it is unclear at the moment whether the politicians and the Russian power industry can resolve this key issue and take a step closer to creating a modern, efficient and sustainable power system that befits the country.

Kind regards,
Heather Johnstone, PhD
Chief Editor

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