Deal activity in the power and utility (P&U) sector spiked in Q2 14, with deal value and volume rising to US$58.1b and 128, respectively, according to EY’s quarterly Power transactions and trends report.
Megadeals dominated the quarter with 12 transactions exceeding US$1b each, driven by US corporate mergers, privatization in Turkey and consolidation in the Russian power generation segment.
Governments push privatization programs
Governments across the globe are looking to invest in growth infrastructure but must first strengthen their balance sheets. The effect of this will be an increase in asset sales in the P&U sector. Australia is looking at privatization activity closely and is expected to have a strong start to 2015 in this regard.
Difficult economic conditions in the European Union have seen several state-owned assets offered up for sale over the past 24 months. The resulting deal activity will provide opportunities for new investors outside of Europe, such as China and Australia. Turkey is also following the privatization route with sizeable M&A activity in Q2 14 seeing generation asset deals of US$4b in the quarter. Privatization reforms in China have seen the government offer up a large number of national projects to private investors. However, it will be challenging for foreign investors to compete with domestic buyers and alliances with local players offer the best chance of success.
Increase in levels of deal activity for majority of global P&U market
In the Americas, deal activity in North America hit a five-year high in Q2 14, reaching US$35.5b, which is a significant increase from Q1 14’s US$6.46b deal value. The increase in Q2 14 is mostly a result of US megamergers, six of which exceed US$1b.
Q2 14 deal activity spiked in Asia-Pacific, with deal volume increasing to 38, up from 21 in Q1 14, and deal value doubling to reach US$7.9b. Domestic consolidation in China made up half the M&A activity in the region.
In contrast, Europe recorded a dip in deal activity as divestments declined over the quarter. While volume remained steady in Europe, value dropped 29% to US$12.4b compared to US$17.4b in Q1 14.
Deal value reached US $ 58.1b
Matt Rennie, Global Transactions Power & Utilities Leader în cadrul EY, comments: “As the sector slowly transforms toward a more information-driven service industry, innovations, emerging technologies and new entrants will be key points on boardroom agendas. We expect large consolidation and sector disruption to drive what promises to be a strong year for P&U.”
Transactions are likely to remain strong
Market reform and unbundling are under way in several new geographies as regulators cut inefficiencies and governments look to raise capital to fund infrastructure. The outlook for transactions will continue to remain strong over the next six months and we can expect to see more billion-dollar-plus transactions in the US as pressure grows to consolidate.
“In the Power sector there are possible significant transactions in the future. Romania should probablyb prepare legislation to allow state-controlled entities to participate in such transactions, both conventional energy and renewable energy. Investments in transport infrastructure remain a priority in both electricity and natural gas”, Valeriu Binig, Partner, Energy Industry Leader, EY România, comments.
About Power Transactions and Trends Data
The analysis and perspectives in Power transactions and trends are based on global financial releases and mergermarket data, as well as global engagements conducted by EY member firms from 2012 to 2014.
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