PricewaterhouseCoopers' 2007 global power deals report

(NEW YORK) April 1, 2008 ― Global power (electricity and gas) mergers and acquisitions (M&A) soared to new record levels in 2007, despite the effects of the credit crunch, according to PricewaterhouseCoopers’ 2007 Power Deals report, an annual review of M&A within the global electricity and gas market. 2007 was a banner year with global deal value reaching $372.5 billion, a 25 percent year-over-year increase and nearly nine times above the $43.0 billion recorded in 2003. Global deal volume jumped from 623 deals in the prior year to 768 in 2007, an increase of more than 23 percent.


There was no clear evidence of a fall-off in deal activity in the latter half of the year when the credit crisis broke. 57 percent of the deal volume, 441 of the total 768 deals in 2007, occurred in the second half of the year. The fourth quarter of 2007 saw deal value rise 73 percent above the same period in 2006.

Power deal activity in North America―Canada and the U.S―soared to $95.2 billion in 2007, a 34 percent jump from 2006 and a 56 percent growth from 2005. Driving the growth in deal value was the $43.8 billion buyout of TXU, Corp. by a private equity consortium led by Kohlberg Kravis Roberts & Co (KKR), Texas Pacific Group (TPG) and Goldman Sachs Capital Partners. This transaction contributed 46 percent to the year's total deal value for the region and roughly 12 percent of global.


2007 North American deal value presented 26 percent of the global value, up from 24 percent in 2006. After a slight dip in 2006, deal volume grew 16 percent to 133 transactions in 2007. While average global deal size slightly increased from $479.6 million in 2006 to $485.0 million in 2007, North American average deal size went from $618.3 million to $715.8 million, a 16 percent growth, for the same period.

John McConomy, PricewaterhouseCoopers Transaction Services US Power and Utilities Leader, shared the following outlook for the sector this year. “Looking ahead, the election year creates more uncertainty as it is likely to prompt potential regulatory and legislative actions, particularly impacting carbon emissions. Global interest (particularly from Europe) in US power assets is expected to remain high with the current relative weakness of the US dollar, despite credit market conditions and continued regulatory uncertainty. Domestically, the credit markets are expected to dampen, at least in the short term, both corporate and financial-sponsored transactions. While significant investments in new nuclear technology remain years away, there remain more immediate needs to invest in power and utility infrastructure. A prolonged credit crunch may push more investments into rate base rather than the competitive markets. There are many questions which will remain unanswered until after the election but, in the meantime, domestic and global companies will not want to miss opportunities to satisfy the tremendous need for power and utility infrastructure investment, as well as Wall Street’s appetite for growth."

Infrastructure funds were active in 2007 investing $83.4 billion globally, up from $52.0 billion in the prior year and from $27.6 billion in 2005. Two of top 10 global deals involved infrastructure funds: the $12.6 billion acquisition of Alinta Ltd by a consortium consisting of Babcock & Brown Infrastructure Ltd and the $6.8 billion acquisition of Puget Energy Inc by an investor group including Macquarie Infrastructure Partners and Macquarie-FSS Infrastructure Trust.

Russian Federation M&A activity dominated the year's top 10 global transactions, accounting for half of the deal volume and a quarter of the deal value compared to nil in 2006. The rise in Russian Federation activity was a result of the restructuring of its electricity sector which brought investment opportunities. Three North American deals were among the top 10 totaling $58.4 billion or 32 percent of the year's top 10 deal value of $181.9 billion, compared to two deals representing roughly 18 percent of the prior year's top 10 deal value of $193.7 billion.

Capturing the M&A spotlight in North America was the $43.8 billion buyout of TXU Corp., one the US' largest utilities, by a private equity consortium. It was the biggest private equity deal on record when announced in February 2007. It was noteworthy not just for its size and highly leveraged structure, but also for environmental concerns surrounding plans to build 11 coal-fired power plants. In the run-up to the deal, KKR and TPG gained the backing of environmental groups by agreeing to scrap those plans and pledging to reduce carbon dioxide emissions.

The two biggest announced inbound investment bids in North America during 2007 – the $7.8 billion move by Spain’s Iberdrola for Energy East and the $6.8 billion planned purchase of Puget Energy by a combination of Macquarie entities and other pension and investment funds – are still pending and under state scrutiny. For example, in the case of the Energy East transaction, Iberdrola, while gaining transaction approval from the state regulators in Maine, still awaits clearance from New York State.

Regulatory uncertainty had deterred foreign investments in North America in 2007, causing deal value to drop by 37 percent to $14.9 billion from $23.5 billion in 2006. During 2007, there were a number of notable moves by European companies for US renewable assets, including Energias de Portugal's $2.3 billion for Horizon Wind Energy and E.ON's $1.4 billion purchase of the North American operations of Airtricity.

In 2008, North American Power M&A activity is likely to be driven by the lack of capital to replace aging infrastructure and the ongoing implementation of renewable portfolio standards at the state levels. “Energy companies will be assessing the impact of satisfying environmental and renewable energy mandates, and may look to private capital for assistance,” said McConomy. “Catapulting this issue is the growing energy demand in emerging markets such as China and India increasing the need for cleaner and alternative energy sources.” Regulatory approval from the state public utility commissions remains an obstacle for dealmakers.

Methodology: Power Deals includes analysis of all global cross-border and domestic electrical and gas deal activity. We use the terms “power utilities sector,” “power utilities” and “power deals” to cover activity in both the gas utilities and electricity utilities sectors. The analysis is based on published transactions from the Dealogic “M&A Global” database, December 2007. Analysis encompasses announced deals, including those pending financial and legal closure and those which are completed. Deal values are the consideration value announced or reported including any assumption of debt and liabilities. Figures relate to actual stake purchased and are not multiplied up to 100 percent. Throughout the report, both for 2007 and for 2006, we classify the Russian Federation in a geographic category in its own right and define Asia Pacific as excluding the Russian Federation. The analyzed sectors referring to North American Industry Classification System (NAICS) include: electric power generation; electric power transmission, control and distribution; natural gas distribution; natural gas transmission; gas transmission and distribution. The term “power” used throughout the report defines these categorized sectors. A full list of transactions throughout 2007 is available by visiting the Power Deals Web site at www.pwc.com/powerdeals.

About PricewaterhouseCoopers

The Transaction Services group of PricewaterhouseCoopers advises companies on mergers, acquisitions, divestitures, joint ventures, sales and financing transactions. Our tailored approach helps clients do the right deals, negotiate with power and control and increase the chances of generating greater returns from transactions. For companies raising money on US or overseas capital markets, we offer a strategic perspective, practical solutions and a holistic approach that helps management anticipate and resolve a broad array of transaction, financial reporting, and registration process challenges before they can have a negative impact on deal value or timing. Our global network consists of over 6,000 transaction professionals in 16 US cities and some 90 locations in North America, Latin America, Europe and Asia.

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