The European power and utilities market is attracting increasing numbers of foreign investors, especially from China, as the value of global merger and acquisition activity in the third quarter of this year hit $38.6bn.
A report out today from analysts at EY reveals that in Q3 there were seven transactions in excess of $1bn, led mainly by independent power producers in the US and network divestments in Europe.
The financial deal value increased 37 per cent compared with this year’s Q2, predominantly involving investments in regulated network and renewable energy assets. Large integrated utilities dominated deal activity as they continued to undertake portfolio optimization and seek stable cash flows.
And the deal value for renewables transactions hit a three-year high of $7.3bn, driven by increased activity in the US – activity which EY expects to continue and drive further M&A momentum.
In its report, EY states that “weak electricity demand, limited near-term capex opportunities and depressed generation profits continue to make business conditions tough for European utilities in 2014”.
“Coupled with increasing pressure to invest in energy infrastructure, this is pushing governments across Europe into asset sales programs and is driving consolidation in their home markets.”
EY illustrates this trend with the sale of a 35 per cent stake in Italian energy-grid holding company CDP Reti to China’s State Grid Corporation for $2.8bn, while Greece is poised to merge its two largest water utilities and Romania needs annual investment close to $6.4bn over the next 10 years to upgrade its energy system.
The report says that an increasing trend is Chinese investors, “particularly cash-rich state power groups, have been ramping up their foreign asset portfolios”.
“European power and gas network assets now make an increasingly attractive asset class as their return is regulated by governments, giving investors a predictable source of income even when the economy is struggling.”
Examples given are the People’s Bank of China buying stakes in Eni and Enel and Shanghai Electric Group taking a 40 per cent share in Ansaldo Energia for €400m.
And EY states that “the trend is likely to accelerate as China looks to diversify its investment into hard infrastructure assets”.
The report found that in Q3 renewable asset transactions in the Americas, notably the US, dominated global clean energy deals, contributing to more than half of the $7.3bn total value.
EY states that key drivers are Environmental Protection Agency regulations “that are forcing coal plant retirements, state-level Renewable Portfolio Standard targets, continuous shedding of non-core assets by integrated utilities and desire for strong yields”.
The report finds that wind power prices are competing with natural gas in the US. “With record capacity under construction, we predict several M&A opportunities in the segment,” it states. “However, uncertainty over Production Tax Credits and natural gas prices could make growth uncertain post-2015.”
Matt Rennie, EY’s Global Transaction Advisory Services Power & Utilities Leader, said: “Europe continues to be the focal point for global M&A as regulated assets come to the market. Countries like Italy, Greece, Spain and Turkey are making assertive moves to kick off asset disposal and privatization plans in order to raise capital.
“Utility divestments are behind a strong deals pipeline in the renewables sector. Historically, Europe and the US have dominated deal activity in the segment, but now new M&A hot spots are emerging. In Sub-Saharan Africa, more capacity will come online this year in non-hydro renewable energy than in the entire period from 2000 to 2013, making it one of the most exciting new markets for renewable energy.”
He added: “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 the sector. We expect the flow of capital to emerging nations to increase as utilities in developed economies look for growth and geographic expansion.”