2005 was a year of incredible electricity and gas assets deal activity. New records were set for the total number of deals, the total value of deals, the value of a single deal and the number of mega-deals. Total deal value soared from US$123bn to US$196bn, much of it fuelled by a US$64.6bn increase in the value of European power assets that changed hands.
Domestic consolidation was the dominant theme as companies sought to expand their vertical and horizontal presence in their main regional markets. Across all territories the trend towards ‘super regional’ utility companies continues. The sector also saw the continued emergence of a new form of global ownership as infrastructure funds played a leading part in deal activity, mainly through the accumulation of network assets.
The surge in deals comes on the back of a similarly huge surge in the previous year leaving the value of total deal activity at nearly five times the level recorded just two years earlier.
Power Deals 2005 examines the forces at work behind this extraordinary deal momentum and looks ahead to the prospect of continued high levels of deal activity. Already, just as we publish this report, Gas Natural's record US$28bn move for Endesa in 2005 has been trumped by a recordsmashing counter-bid from E.ON in 2006 which is not just a new high in the utilities sector but is also the second biggest cash bid in any sector of all time.
The report examines the rationale behind the overall trends and the key individual deals. We also highlight, in a series of deal dialogues throughout the report, some of the critical issues for companies engaging in deal activity within the sector drawing on our global experience as an adviser to players in major deals throughout the sector in all key power and gas markets.
Report highlights
- The year of the blockbuster
2005 saw a full flowering of the mega-deal in the power sector. The sector has seen some notable deals in excess of US$10bn in previous years but never more than one in a single 12-month period. Yet, in 2005, there were five such blockbusters, topped by Gas Natural’s US$28bn move for Endesa. The growing frequency of mega-deals reflects high asset values and the scale now reached by companies as they march towards ‘super regional’ status.
- Utility companies consolidate in home markets
Domestic deals dominated the power deal landscape, accounting for 71% of the value of all deals. Even this underestimates the scale of home market activity since a large proportion of the other deals, classified as cross-border, were either moves by European companies to grow further in foreign markets where they were already present (eg E.ON’s Powergen acquiring additional assets in the UK) to build scale in adjacent countries within a relatively contiguous home market (eg Vattenfal’s incursion into Denmark) or were the public offerings of three big European privatisations.
- Financial players build global portfolios
The global model, however, is far from dead in the power sector as a series of deals reflected the aggressive intent of a new, growing breed of infrastructure funds to acquire global portfolios of, mainly, network (eg CVC Capital Partners (CVC) acquiring Ruhrgas metering) and other regulated assets (eg Challenger Infrastructure Fund’s acquisition of Inexus’ gas networks in the UK). The scale and ambition of these pooled funds is beginning to make a significant mark on the ownership structure of the industry.
- Stand by for further adventure
A new paradigm of high fuel prices and security of supply concerns is already prompting a blurring of traditional boundaries between upstream fuel supplies and utility company operations. As we look ahead, we can expect to see greater integration of upstream and downstream entities and, as the ‘super regionals’ continue to build scale, we do not rule out an eventual return to more stretched geographic footprints.
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