Soaring deal value up in the clouds
2016 has been a bumper year but the outlook is more clouded for 2017. Deals for US targets have been putting the rocket fuel behind high worldwide power and renewables total deal value. But we expect momentum may slow as dealmakers assess the implications of a changed economic outlook and rising interest rates. A lot of the impetus for soaring deal value has come from big network infrastructure deals. A significant flow of such deals will continue to come to the market in 2017 but together they may not match the 2016 total which was boosted by a number of big gas network transactions.
Energy change trumps the politics
We don’t expect the uncertainties about climate change politics arising from the Trump presidency to have a significant impact on broader power and renewables M&A activity. To an increasing extent, the economics and momentum behind decarbonisation and wider energy change are now eclipsing the politics. Renewable energy enters 2017 in a stronger competitive position than in previous years. And wider technological developments in areas such as energy storage, distributed generation, electric vehicles and smart grids are adding to energy change.
A new chapter in corporate strategic moves is opening up
A number of leading European utility companies are resetting their sights outward on future strategic moves as they complete major corporate restructuring and divestment programmes. For example, Innogy, the networks, renewables and retail operations recently floated by RWE, intends to use the €2bn IPO proceeds to fund future-oriented investments in the renewables, grid and infrastructure business areas as well as in retail innovations. Increased investment in US onshore wind energy is part of the agenda for both Innogy and its German rival E.ON.
Thirst for yield set to raise valuations still further
It’s been a bumper year for sales of network infrastructure and other assets underpinned by steady, predictable and often inflation-hedged regulated returns. Interest in regulated utilities has remained strong and valuations have hit historic highs. We expect the demand side of this trend to continue in 2017 with the key questions being the level of impact from rising interest rates and the availability of assets on the supply side. Any shortage of targets could put upward pressure on deal premia, however, rising interest rates will most likely have the opposite effect, potentially putting pressure on valuations, widening the bid-ask spread and slowing deal activity.
Chinese and Far East investor appetite strong despite setbacks
The appetite of Chinese and Far East investors for international power sector investments remains very strong. But it isn’t for the fainthearted with setbacks derailing some recent deals, notably Chinese and Hong Kong investors getting knocked out of the running in the Ausgrid sale process and Chinese investment in Belgium’s Eandis being placed on hold. National interest and security concerns are reinforcing the trend towards participation in joint and consortium arrangements, such as Chinese state entity investment with EDF of France in the Hinkley Point nuclear power project and China Investment Corporation’s participation with Macquarie in a broader consortium purchasing National Grid’s UK gas distribution business.
Energy transformation underpinning important moves
We expect to see more deals involving power companies and companies outside the sector with energy transformation in mind which has been underpinning some significant but mainly smaller deals. Companies are seeking to gain the technological and customer facing capabilities to get ahead in a new more distributed energy world where energy also stretches into adjacent sectors such as e-mobility and all industries experience a growing awareness around energy management. Much of the focus is on energy services and distributed generation, as seen with Centrica’s recent acquisition of ENER-G. New entrants from outside the sector are also competing in this space, as seen by Total’s decision to enter the energy supply market with its purchase of Lampiris in Belgium and battery maker Saft.
Renewables delivering significant deal share
Recent renewables total deal value has been subdued in Europe and the Asia Pacific region and has been relatively flat in North America on downward volume. Nonetheless, we expect renewables to maintain a significant share of sector deal activity. Deals for renewable targets now comprise more than half of worldwide sector deal volume although typical deal sizes remain small. Larger deals continue to be often mainly focused on hydropower assets.
Make or break for some thermal assets
It’s make or break in many territories for some thermal generation assets, particularly coal-fired power stations. Sales are proving hard to get away. 2017 is set to see the landmark closure by Engie of the Hazelwood brown coal-fired power station, which has been meeting up to 25% of the state of Victoria’s energy requirements and 5.5% of the whole of Australia’s energy demand. Some niche buyers are hoovering up thermal assets. In Europe, Czech-based energy group EPH is building a business purchasing fossil fuel generation assets that other utilities want to get rid of.