Deal value across the global power and utilities (P&U) sector climbed to a two-year high in Q3 2017, according to the latest EY Power transactions and trends report.

This was driven largely by outstanding increases in mergers and acquisitions (M&A) in the Americas (+798 per cent) and in Europe (+60 per cent).
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The Americas saw P&U deals reach $53bn, nine times the value recorded in Q2 2017 and the highest since Q3 2015, propelled by five megadeals representing 96 per cent of the region’s deal value. Meanwhile, better-than-expected economic activity in Europe saw Q3 deal value increase to US$16.9bn, up 60 per cent from US$10.6bn in Q2.

The biannual EY Power and Utilities Capital Confidence Barometer (CCB) indicates that this deal momentum is set to continue, with 79 per cent of executives expecting the global economy to improve in the next 12 months and 51 per cent preparing to actively pursue acquisitions. A majority (99 per cent) of executives also expect corporate earnings to improve or to remain the same.

The CCB also finds that greater confidence around credit access and market stability is expected to drive investments and deal-making intentions. More than half (55 per cent) of executives now anticipate improvement in capital market conditions, compared with just 34 per cent six months ago.

Matt Rennie, EY Global Power & Utilities Transactions Leader, says: “With unanticipated levels of M&A activity across the power and utilities sector, particularly in the Americas and Europe, all major engines of global deal-making are now moving firmly upward. Deals in Q3 indicate that private equity is likely to be the biggest story across the sector over the next 12 months, with 87 per cent of CCB respondents indicating that they expect the number of companies impacted by shareholder activism to increase or stay the same.”

High levels of government intervention, including changes in trade policy and protectionism, remain the biggest perceived risk to growth for the P&U sector according to 42 per cent of CCB respondents. The need to balance near-term opportunity with long-term value creation also presents the greatest challenge to the C-suite, with 67 per cent looking to pursue growth organically. However, 50 per cent cite growth in market share and acquiring innovation as key M&A drivers.

Digital transformation is driving M&A

The CCB further highlights how technology is changing customer behaviors, creating pressure for sectors to converge to meet new demands. Sixty-six percent of respondents state that they are taking proactive measures to address the impact of digital transformation, with 46 per cent planning to build more digital capabilities in-house and 30 per cent looking to buy – or form alliances with – digital companies.

Rennie says: “The pace of disruption and innovation is compelling power and utilities companies to review their portfolios more regularly. And megadeals in the third quarter of 2017 highlight how industry consolidation is increasing and creating larger, and more diversified portfolios around the world. Those companies that can better identify emerging trends will be able to readjust their portfolios and recycle capital to take advantage of new growth areas.”

Geographically, the US and Germany are the top two P&U investment destinations the report finds, with the former hosting several deals involving distressed assets despite increased scrutiny around deals involving regulatory assets and uncertain federal energy policies. Notably, activity was buoyed by the return of large independent power producer deals across the US and Europe. Brazil, Australia and China are also among the top five investment destinations according to the CCB.