Market reform and new technology drive M&A activity
While they were of lower value, power and utilities (P&U) deals in Q2 outnumbered those of Q1, with transactional activity dominated by market reform outcomes, renewables and new energy.
Could this be the beginning of a new era in P&U investment?
With sustained deal activity in conventional generation still subdued, P&U transactions are taking on more unpredictable characteristics. Quarterly reports of transactional activity are dominated by large network asset sales combined with a steady undercurrent of low-value renewables and new energy deals. Deal value dropped in all regions except Europe (+12%), with the Americas recording the biggest decline (-72%). It may be tempting to impute a reduction in overall activity and sentiment from these numbers, but we do not subscribe to this view. The continuing low interest rate environment and a surplus of global capital against available opportunities provide a favorable environment and outlook for P&U assets. As we explain further in this issue, reform initiatives, the rising value of network assets and the quest for a new energy business model that is capable of deploying bulk capital mean that investment remains top of the agenda for corporate investors, funds and new entrants in 2017. Q2 2017 has provided the most obvious outline of a trend that is starting to emerge in P&U transactions, where deal value decreases alongside underlying growth in deal volume. This illustrates the following: 1. The increasing role that renewable energy is playing in overall investment, as a landing pad for the deployment of funds that would otherwise have been invested in conventional generation, but that is now stymied by overcapacity in developed markets. Small value deals in renewables accounted for 48% of total deal volume but just US$6.1b of deal value. As demand for these assets increases, so do their valuations. Renewable assets traded at high premiums to long-term price-to-earnings (P/E) multiples across the regions, with Europe’s 79% premium the highest this quarter. 2. Asset privatizations are becoming a driver of network asset sale activity. Governments are selling stakes in utilities to aid economic growth and take advantage of record multiples for these assets, particularly as long-term valuations face uncertainty as batteries and new energy investments threaten the future of the peak (and the capex that supports it). Almost half (43% or US$13.3b) of Q2 deal value was driven by energy reform and privatizations. This included four billion-dollar-plus transactions. We expect these factors to gain momentum in the coming quarters until new energy and renewables mature to their ultimate places in the supply chain, and the implications on the value of generation, networks and retail become clearer. Already, the increasing presence of renewables is spawning new markets ^gj_Yk%Õj]\_]f]jYlagfYf\ZYll]ja]klg provide reliability and security of supply. Transactions in this space will likely be driven primarily by corporate investors. For example, Enel, Dynergy and Eneco recently acquired energy trading, battery storage and virtual power plant assets. Mitsubishi and Eneco have also announced plans to set up a 48 MW battery storage project in Germany. As the P&U sector transitions into this new era, investors will need to take note of new conditions. In particular, ÕfYf[aYdafn]klgjkemklj]eYafYoYj] that new technologies designed to arbitrage technical shortfalls — for example, intermittent frequency and peaking demand issues — will have value implications for traditional market players unless they evolve. This is particularly the case when competing to deploy capital into an oversupplied conventional market or where deal availability is dependent upon government decisions surrounding privatization and reform. US Inves