Are we seeing a return of the mega power deal?

PricewaterhouseCoopers’ (PwC) well-respected ‘Power Deals: Annual Review 2009’, which provides a detailed analysis of the mergers and acquisitions (M&A) activity within the global gas and electricity markets, makes interesting reading. One of the report’s key findings was that the challenging funding environment, coupled with regulatory uncertainty and a fall in energy demand, created a tough deal environment last year.

Despite the number of deals falling by 10 per cent, compared to 2008, it remained at a relatively high level. However, what is significant is that the average deal value plummeted from $428 million in 2008 to$262 million. This kind of figure was last seen in the early 2000s. Clearly, smaller deals were the preferred choice of participating companies.

As in the 2008 report, Europe again dominated the top ten list ” with 70 per cent of the largest transactions involving European companies on both sides of the deal. Interestingly, the Asia-Pacific region eclipsed North America for the first time ever, with China unsurprisingly dominating the deal-making.

Although PwC’s report concludes that continuing uncertainty and reduced demand will cloud the short-term deal outlook, it is not all doom and gloom. One potential development it highlighted was the possible re-emergence of the large international M&A move, i.e. the so called mega power deal, as companies with strong balance sheets look for growth opportunities right across the globe.

Are we in fact starting to see this already? Last month’s confirmation of the takeover of the UK’s International Power by GDF Suez may well be the first indication.

Under the terms of the deal, which is best described as a tie-up of the two companies rather than a classic merger, GDF will transfer its international assets to International Power, with France’s second largest utility owning 70 per cent of the newly-formed company and International Power the remaining 30 per cent. International Power shareholders will also receive a generous dividend totalling à‚£1.4 billion ($2.2 billion).

Analysts have struggled to put a value on the deal primarily because the value of the GDF assets being transferred has not been made public. However, The Times newspaper reporting on the speculated link-up back in January suggested the deal could be worth an eye-watering à‚£6 billion ($9.2 billion).

Regardless of what the deal is actually worth, it does represent the first major takeover the global electric power sector has seen since the credit crunch hit and, without doubt, it falls within the ‘mega deal’ category.

The new combined company is to be called New International Power and is already being called the world’s biggest utility. According to International Power, the tie-up is expected to be completed either “at the end of 2010 or early 2011.”

PwC’s report does make an interesting prediction, and one that the wider corporate market appears to agree with. According to a report in The Sunday Times newspaper, corporate financiers are predicting a resurgence in deal activity across the board in 2010, citing a return in confidence among chief executives as a key driver. “I think we saw the lowest ebb of this M&A cycle in 2009 and conditions are right for a pick-up in activity in 2010,” said Anthony Parsons, head of the UK mergers and acquisitions team at Deutsche Bank.

Of course, the current economic environment is still far from perfect and only time will tell if we have seen the worst, but if the GDF Suez, International Power deal is a bellwether, the global power industry could well be on the way back up.

Kind regards,
Heather Johnstone
Chief Editor

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