M&A power deal numbers surge while values slump says PricewaterhouseCoopers

21 JAN 2009 - While number of deals soared, the value of deals plummeted as companies faced the new reality of the financial crisis and, in key markets, adopted a ‘wait and see’ approach to big acquisitions. The latest edition of Power Deals, the annual review by PricewaterhouseCoopers of power sector M&A, shows a 24% increase year on year in worldwide 2008 power deal numbers, up to 954 from 768 in 2007, but a 41% plunge in total deal value, down to US$220bn from its record level of US$372.5bn in 2007.

In each of the major markets – North America, Europe and Asia Pacific – deal numbers were up. While European entities dominated deal value, the incidence of deals was more evenly spread across the major regions worldwide – 35% in Europe; 29% in Asia Pacific and 24% in North America (by bidder). In all these regions, the pattern was similar – with deal numbers up but values down.

Manfred Wiegand, global utilities leader, PricewaterhouseCoopers commented:

“The billion dollar question on the outlook for deal-making is, of course, how long we will have to wait for liquidity to return to the debt markets. Also of importance will be the speed at which climate change policy is clarified in the first year of the Obama presidency and in the run-up to the December 2009 UN Climate Summit in Copenhagen.”

Key trends highlighted by the Power Deals 2008 report include:

Nuclear deals in the spotlight
The revival of nuclear power is being reflected in a race among the big players to position themselves globally to capitalise on planned expansion. France’s EDF took the spotlight in 2008 as it went on the acquisition trail in the UK and the US for nearly US$30bn of assets - in deals with British Energy and for just under 50% of the nuclear generation portfolio of Constellation Energy. The nuclear revival also spurred a number of non-M&A joint venture deals between utility companies and nuclear technology and construction companies.

Gas players sit tight
Gas deals were notably absent as holders of gas assets sat tight on valuable reserves and comprised 11.6% of all power deals and just 7% of total power deal value. The tight hold companies are exerting on gas was highlighted by Origin Energy’s successful resistance to BG Group’s US$13.3bn takeover bid.

Key markets

North America
While bidder numbers rose by up to 58% in North America, total value fell by 54% (from US$87.5bn in 2007 to US$40bn in 2008). This was mainly due to the absence of mega-deals on the scale of US$21.6bn Kinder Morgan and US$43.8bn TXU. Excluding these two mega-deals from previous year totals, underlying bid activity by North American entities was comparable with those in previous years – US$32.9bn in 2006, US$43.7bn in 2007 and US$40bn in 2008.

Europe
Europe loomed large in terms of the geographical distribution of deal value, accounting for more than half of the worldwide value of all deals – 58% by bidder and 53% by target. The impact of Europe on 2008 power deal totals was driven by the number of large deals involving European companies. Six of the ten biggest deals and 45% of all US$1bn plus deals were from European bidders.

Asia Pacific
Total 2008 target deal value fell to just US$25.9bn, a 49% fall from US$50.4bn in 2007. Asia Pacific bidder activity was similarly down – by 42%, from US$47.6bn in 2007 to US$27.4bn in 2008. All but 3% of target value was for electricity assets. As in other regions, owners sat tight on valuable gas assets. The value of deals for Australian targets plummeted from US$19bn (37.7% of all Asian Pacific target value) in 2007 to just US$1.75bn (6.7% of all Asia Pacific target value) in 2008. The majority of Asia Pacific bid activity came from Chinese and Japanese entities. Together Chinese and Hong Kong-based bidders accounted for US$9.8n (35% of all Asia Pacific bidder value).

Mark Hughes, Utilities Market & Value Advisory PricewaterhouseCoopers, said:

“The coming year will be one of obstacles and opportunities. The constrained availability of finance will inhibit deal activity and, until that situation is eased, there is unlikely to be a revival in deal values. But with some businesses running short of cash for needed expansion or facing refinancing challenges, businesses and assets may become available for corporates with strong balance sheets and cash flows.”

Notes to Editor:

* Cross-border deal activity is defined as acquisitions across territory, with domestic acquisitions referenced as within home markets.

* 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 2008. 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%. Throughout the report, both for 2008 and for 2007, we classify the Russian Federation in a geographic category in its own right and define Asia Pacific as excluding the Russian Federation. The analysed 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 categorised sectors. A full list of transactions throughout 2008 is available by visiting the Power Deals website at www.pwc.com/powerdeals .

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