The global power and utilities sector saw its healthiest first quarter financial results in three years, according to analysis by EY.

The consultancy’s Power & Utilities (P&U) Power transactions and trends report makes for encouraging reading for the sector. The report highlighted that deal value reached $28.2bn for the quarter, up 11 per cent on 2013, and up 8 per cent on 2012.

Matt Rennie, EY’s Global Transactions Power & Utilities Leader said, “With the exception of 2011, after Q1, deal value in the sector has always risen; and based on the upcoming deals and current trends, it is highly likely deal activity will increase in the coming quarters.  This healthy outlook reflects our latest Power & Utilities Capital confidence barometer (CCB), which reveals continued optimism in the global economy, with 61 per cent of global P&U executives seeing an improvement in conditions.”
M&A
Financial investors dominate M&A in Europe as they diversify into infrastructure

While overall deal value for the quarter was down on Q4 2013, financial investor deal value doubled, reaching $14.3bn, with an average deal size of $950m. This is the highest level for three years, reflecting strong confidence in utility assets, and this momentum is expected to continue as infrastructure and pension funds look to diversify investment portfolios with renewable energy, pipelines, utilities and transportation assets.

The quarter also saw a significant rise in financial buyer activity in Western Europe, driven by regulatory and economic uncertainty, the prolonged energy crisis and natural gas supply concerns. Major utilities across the region are transforming themselves into providers of energy services. While some are retrenching, cutting costs and divesting assets; others are diversifying into new, more profitable international markets and this is expected to continue.

In the Americas, deal activity in North America remained buoyant at $3.5b for the quarter, however this is lower than previous first quarters, primarily due to an absence of any megadeals. In Latin America, deal activity was extremely strong, at $3.1b for the quarter, with Brazil dominating deal volume with seven of the nine deals in the region and accounting for 50 per cent of the deal value.

Deal activity in the Asia Pacific region halved in Q1 2014 compared with Q4 2013, as megadeals remained absent from the region. Renewables deals formed the bulk of the activity in the region, contributing $2.8b (63 per cent) of total regional deal activity. China registered the largest number of deals, hosting seven deals worth $2.1b, spurred by an increasing push toward clean energy sources in the country, which drove investor confidence higher.

Emerging markets continue to receive significant capital inflows from Western Europe and other developed nations, where utilities continue to face slow growth or negative price trends. China, the US, India, Brazil and Singapore are P&U companies’ top five investment destinations, and 72 per cent of those surveyed for the CCB indicated that they intend to deploy acquisition capital into the emerging markets.

This movement is boosted by governments keen for capital, with countries such as India and Brazil taking steps to introduce regulatory reforms to create an attractive environment for foreign and private investment.

When looking ahead to what will impact acquisition and divestment strategies for the remainder of 2014, the key factors include shale gas; declining energy demand in the US; distributed energy, market uncertainty and generation mix challenges in Europe; infrastructure build-out in Africa; and consolidation and privatization in Asia Pacific.

Rennie said, “These factors are changing the market, and utilities are scrambling to realign their strategies. Disruption, digital, and utility transformation will dominate deal activity in coming years. As the P&U sector transforms into a customer- ordinated, distributed and technologically driven industry, network companies are starting to feel the pressure.  

These companies, which have traditionally operated in the absence of competition, need to quickly identify and re-establish their place. This involves an acceptance of the reality of large scale long term distributed generation, and continued falling demand on the shared network, into core business strategies.”

“These are exciting times. This is a time of significant change as traditional utilities struggle to find a core area of strength from which to maximize returns.”

To download the reports and historical data, visit: www.ey.com/PTT and www.ey.com/powerandutilities/CCB .