Report: M&A Appetite Hits Seven-Year High in Power and Utilities Sector

Fifty-nine percent of power and utilities executive respondents expect to actively pursue an acquisition in the next 12 months, according to the latest biannual EY Power & Utilities Capital Confidence Barometer. That demonstrates a 12% increase in M&A appetite since the last Barometer (47%), and a seven-year high.

What’s more, survey results reveal that 89% of executives expect their deal pipeline to increase or remain stable in the next 12 months. This suggests deal momentum that characterized the beginning of the year is set to continue. The latest EY Power transactions and trends report supports this trajectory, showing that deal values remained steady in 2017 with a total of US$45.5 billion.

 “The global power and utilities transaction environment in the first quarter of the year saw the trends established in 2016 endure,” Matt Rennie, EY Global Power & Utilities Transactions Leader, said. “In developed countries, investors continued to seek assets that guaranteed secure returns, while in developing countries, the need for electrification and greenfield infrastructure drove investment.”

Transmission and distribution assets, together with renewable energy assets, attracted a combined US$35.6 billion in investment in Q1 – 78% of total deal flow. First quarter growth in deal value for renewable energy was higher than that recorded in any other market segment when compared with Q4 2016.

Looking ahead, more than half (53%) of power and utilities executives cited growth in market share and moving into new geographies as key drivers for pursuing M&A.

Traditional power and utility players are facing increased competition for market share from outside the sector. Digital transformation remains a priority for many seeking to add innovative capabilities, improve customer engagement and stay relevant in a changing market.

Geographically, the greatest share of first-quarter global power and utilities deal value originated in the Americas (US$21 billion) and Asia-Pacific (US$15.1 billion). Together, these regions contributed 80% of the quarter’s total M&A value. The Americas is likely to remain the top M&A destination as executives identified the U.S., Brazil and Canada within their top five targets for the next 12 months.

While deal activity is expected to remain strong throughout 2017, Power transactions and trends identifies how higher interest rates, a trend toward recovery in Europe’s power and utility market and significant shifts in the underlying economics of battery technology could see a change in investment profiles. In the Barometer, 68% of executives also identified geopolitical or emerging policy concerns as risks to growth.

“Government intervention in traditional power markets – that have a simple energy system of centralized generation – is typically predictable,” Rennie added. “But, as our energy systems become more complex, the impact of policy could be detrimental to inbound investment. Encouraging deals in areas like merchant generation, new technology and parallel sectors that will define the future of energy, first demands markets that attract investment.”