M&A power surge

Merger and acquisition activity in the world’s utilities market broke all records in 2006, with Europe’s electricity sector leading the way.

In the recently published Power Deals Annual Review 2006 by Pricewater-houseCooper, total bid values reached a record $298.8 billion. This represents an extra $102.6 billion, or a 52 per cent increase, on 2005, and almost seven times the $43 billion level seen in the sector only three years earlier. In this article we present the main findings of the study.

Approximately half of the 2006 increase was accounted by E.on of Germany’s $66 billion bid for Spain’s Endesa. E.ON’s bid led a group of five so-called “mega-deals”, i.e. bids worth in excess of $10 billion.

Last year was also the first time that more than one mega-deal in the power sector topped the $20 billion mark in a single year. In fact, there were three such deals. In addition to E.ON’s bid for Endesa, there was Suez’s $43 billion planned merger with Gaz de France and Iberdrola’s $23 billion move for Scottish Power. The total number of deals in the utilities sector rose 18 per cent. Furthermore, although the share of cross-border deals was similar to previous years (32 per cent in 2006 versus 31 per cent in 2005), the surge in European deal activity increased the share of cross-border deal value significantly (46 per cent in 2006 compared to 29 per cent in 2005). The majority of cross-border deals in Europe involved European companies. The respective share of electricity and gas targets in each region was approximately 70/30, with the exception of North America, where electricity targets fell to 33 per cent of target values.

All electricity and gas deals (both domestic and cross-border) by value, 2000-2006
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Transactions valued at under $1 billion accounted for 94 per cent of the total number of deals last year. Their average value has also risen significantly from $175 million in 2003 to $727.1 million in 2006.

The key driver behind much of last year’s deal activity is identified as the continuing move to achieve “super-regional” status. Company balance sheets and cash flows have been boosted by high commodity prices, equipping companies with the capability to go out and actively look for deals.


Europe was without a doubt the main focus of merger and acquisition(M&A) activity last year, with the number of European bidders up 25 per cent on 2005. Almost two-thirds, or 64 per cent, of the total bid value came from European companies, while 58 per cent of total target value comprised European targets. Thus, 2006 saw a substantial shift in the level of deal activity away from the USA and towards Europe.

The combination of the decline in deals in North America and the upsurge in activity in Europe resulted in a gap of more than $100 billion in the total value of electricity and gas targets between the two regions. European players also pursued targets worth just under $200 billion, while their North American counterparts moved on targets that had a total value of just $54.5 billion. This represents a $136.1 billion difference. This gap has opened up very quickly; with bid totals between the two regions in 2005 only being $24.4 billion, while North American bids and targets significantly outstripped those in Europe in 2004.

European utilities spent much of last year positioning themselves ahead of the full liberalization of the European Union energy market, which comes into effect in July. This is likely to ultimately mean only a handful of players in the market. Thus, the deal making of the super-regionals, such as E.ON, reflects their drive to be within this select group. Some deals were motivated more by the desire to put themselves beyond the reach of acquisitive companies, as was the case with the Iberdrola/Scottish Power bid.

The continued pressure to diversify and secure energy sources also played an important role in last year’s activity.

The security of supply is an important part of the EU’s energy strategy, and it is expected that these emerging super-regional energy companies will not only deliver economies of scale to allow them to better serve their customer base, but also to be in a stronger position to secure energy supplies.

Almost all of the big corporate utility deals in this region were focused on consolidation within Europe. The exceptions were National Grid’s $12.4 billion bid for KeySpan and International Power’s $1.1 billion purchase of Topaz Power Group’s generating capacity.

North America

Although the North American target value rose by 15 per cent on 2005 levels, there was a definite lull in the deal activity in the region, with a $36.8 billion drop in electricity bids by North American companies. Total electricity bid value was down from $57.5 billion in 2005 to $20.7 billion in 2006, a drop of 64 per cent, bringing it close to the 2003 level of $16.7 billion.

In the electricity sector, the number of bidders was only slightly up – seven per cent – on last year’s level, but activity was largely confined to the lower end of the market. Dynergy’s $4.1 billion merger with LS Power was one of the significant deals that took place in the USA market last year.

The deal resulted in a combined company with more than 20 GW of power generating capacity from 31 plants in 15 states. However, with the except of the Dynegy/LS Power deal, USA utility companies shied away from any further meaningful consolidation deals.

The reticence of the USA utility companies towards further consolidation appears to reflect the regulatory environment in the region. Following the repeal of the Public Utility Holding Company Act, an obstacle to consolidation in the market was removed. However, its absence led to some public service commissions (PSC) stepping in and the placing of restrictive conditions on deal proposals.

Two deals that fell foul of the PSCs were the $11.2 billion merger of FPL Group and Constellation Energy Group and the Exelon Corporation’s $26.1 billion bid for PSEG. Following the intervention of the Maryland PSC and the New Jersey PSC, respectively, both deals were effectively “taken off the table”.

Private equity deals accounted for $52 billion of the bid activity in the USA, which is almost double the $27.6 billion conducted in 2005. GS Capital-led consortium’s $21.6 billion deal for Kinder Morgan was the fourth largest deal in 2006.


The total value of deals in the Asia-Pacific region has consistently grown year-on-year. In 2006, this trend continued, with the total value of bids from this region more than doubling, from $17.2 billion to $43.6 billion between 2005 and 2006.

The number of deals in the region’s electricity sector rose by 26 per cent, while total target value for Asia-Pacific electricity assets increased 141 per cent to $34.2 billion.

Liberalization and reform in Australia, and to a lesser extent in other Asia-Pacific countries, has encouraged a number of companies to continue on the road to super-regional status. The biggest deal in the region was the purchase of AGL’s infrastructure business by Alinta, and in a related transaction, the renamed AGL Energy acquiring a 33 per cent stake in Alinta’s Western Australian retail and co-generation businesses.

Close behind this all-Australian deal, was the all-Malaysian $4.7 billion bid for Malakoff by MMC. Malakoff was the country’s largest independent power producer. Much of the deal making in the region is by Australian companies, which accounted for 43 per cent of all Asia-Pacific power deal bidder value in 2006.

China and Russia each accounted for a 15-16 per cent share of the region’s power deals. The total value of deals put forward by Russian and Chinese bidders was $15.1 billion – a five per cent share of all deals across the globe.


The high levels of M&A activity in the electricity and gas sectors is expected to continue because all the fundamental motivations such as strong investor appetite, high commodity prices, the need to secure and diversify fuel sources and the importance in non-organic growth, remain in place. There is still considerable room for consolidation in most of the major world markets, and in particular in the United States where its power sector remains relatively fragmented. Europe is in a more advanced stage of consolidation, but there are still opportunities for some remaining big deals as the super-regionals jostle for position in the lead up to market liberalization.

One trend that is likely to continue is the so-called “pre-completion effect” that once a deal is in the spotlight, other bidders emerge from the woodwork. In 2007 we have already seen an example of this, with Enel’s recent purchase of a stake in Endesa, potentially putting a “spanner in the works” for the E.ON deal, which is close to completion.

The lull in the M&A activity in the USA is unlikely to represent a permanent downturn. However, the influence of state regulators on the power market is expected to persist, and they will continue to play a major role in any future deals.

The trend towards a greater involvement of private equity companies, particularly in the USA marketplace is likely to continue. This has already been seen with the recent $44 billion bid for TXU by Kohlberg Kravis Roberts and Texas Pacific Group.

The power deal market in Asia Pacific looks set to remain buoyant. As more of the Asian market opens up there will be a stream of assets coming onto the market. Furthermore, with deal values high and competition of assets intense, there is a strong likelihood that utilities from outside the region, which have invested in the past, will take the opportunity to sell in the region.

Worldwide, the momentum in the sector will remain strong, and although deals may now take longer to complete, busy times ahead are forecast for power utilities.

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