Power and utilities deals insights: Mid-year 2020
North American Power & Utilities (“P&U) deal value fell to the second lowest half-yearly total since 2015, primarily resulting from the broad impacts of the COVID-19 pandemic and commodity price declines.
With the onset of the COVID-19 global pandemic in the first half of 2020, merger and acquisition (“M&A”) activity in the P&U sector saw reductions in both deal activity and total deal value. Both deal volumes and deal values fell below historical averages. On a deal volume basis, total deals reduced from 29 in H1 2019 and 23 in H2 2019 to 15 in H1 2020. On a deal value basis, total deal value reduced from $20.1 billion in H1 2019 and $22.8 billion in H2 2019 to $13.3 billion in H1 2020. Various factors impacted the deal market in H1 2020 including short-term utility load/demand declines with shelter in-place restrictions and changes in working environments, broad commodity price declines, liquidity concerns and uncertainty in timing of recovery.
“Uncertainty and fundamental economic impacts due to COVID-19 resonated to deals this period. As market participants focused on current business impacts, inorganic activity was limited. We expect this trend to continue as compared to prior periods until uncertainty dissipates, with some opportunities for deals for those well positioned to execute.”
High level trends and highlights
- Deals in the P&U sector experienced a decline in both total deal volume and deal value in H1 2020 as compared to both H1 2019 and H2 2019, with the second lowest deal market since H1 2015.
- Financial players drove the majority of the half-year deal value, accounting for 76% of the total deal value in H1 2020.
- Corporate deals drove the majority of the half-year deal value, contributing 82% of the total deal value in H1 2020.
- Renewable deals continued to drive a significant portion of sector deal activity, with 73% of the total deal value.
- Inbound interest remained strong in the half-year with 68% of the total deal value, particularly from Canada inbound investors.
- In H1 2020, financial investor deals outpaced strategic investor deals on a deal value basis, with 76% of total half-yearly deal value. This was an increase on a percentage basis compared to 41% in H1 2019 and 50% in H2 2019.
- H1 2020 financial deal value was driven by the $8.3 billion megadeal of Brookfield Renewable Partners LP’s acquisition of the remaining 38.5% share of TerraForm Power, Inc.
- Strategic investment deal value declined in H1 2020 compared to H1 2019 and H2 2020. Strategic deals accounted for 24% of total half-yearly deal value, compared to 59% in H1 2019 and 50% in H2 2019.
- However, strategic investors accounted for the largest share of deal volume in the sector for H1 2020, accounting for 53% of deal volume. This was a decline on a percentage basis compared to 76% in H1 2019 and 61% in H2 2019.
- Eversource Energy’s acquisition of Columbia Gas of Massachusetts Natural Gas Assets was the largest strategic deal for the half-year, with a deal value of $1.1 billion.
- Deals of >=$1 billion contributed 13% of deal volume in H1 2020. However, they represented 71% of total deal value in the half-year.
- While deals ranging from $50-$100 million accounted for the largest share of deal volume at 27% for the half-year. However, these deals only accounted for 2% of the total deal value.
- The other three deal value categories reflected an equal 20% of total deal volume for the half-year. The $500-$1 billion category contributed the highest value for these categories to total deal value with 16% for the half-year.
- In terms of deal volume, asset deals continued to lead corporate deals, with ten asset deals (67%) compared to five corporate deals (33%) in the half-year. While still leading deal volume on a percentage basis for the half-year, asset deals on percentage of deal volume declined compared to 72% in H1 2019 and 78% in H2 2019.
- Corporate deals accounted for 82% of total deal value in H1 2020. This represented an increase on a percentage of total deal value basis compared to 48% in H1 2019 and 43% in H2 2019. The top three deal value deals for the half-year were corporate deals.
- In a change compared to recent prior half-years, asset deal value dropped to 18% in H1 2020, compared to 52% in H1 2019 and 57% in H2 2019.
- Domestic deals accounted for the majority of deals in the sector on a deal volume basis, accounting for 67% of deal volume for the half-year. However, domestic deals on a percentage of deal volume basis declined as compared to 76% in Q1 2019 and 70% in Q2 2019.
- In terms of deal value, inbound deals represented the largest share of half-yearly deal value of 68%. This reflected a sizable increase on a percentage of total deal value basis compared to 24% in H1 2019 and 49% in H2 2019.
- The sole megadeal of H1 2020 was an inbound deal, Brookfield Renewable Partners LP’s acquisition of the remaining 38.5% share of TerraForm Power, Inc.
- The second largest deal of the half-year was a domestic deal, Eversource Energy’s acquisition of Columbia Gas of Massachusetts Natural Gas Assets.
Transaction multiples
- Enterprise Value (EV)/Earnings before interest, taxes, depreciation and amortization (EBITDA) and Price/Earnings (P/E) transaction multiples for gas utility transactions have trended upwards over time, as buyers have paid premiums for growth opportunities.
- With the changing makeup of the United States generation supply, dealmakers remain interested in gaining exposure to gas and electric transmission infrastructure, as well as renewable investments.
- As the industry consolidates, small and mid-cap utilities have been viewed as potential acquisition targets.
Trading multiples and indices
- Natural gas transmission and distribution continue to set the high end of the range of trading multiples for sub-sectors, primarily driven by the continued interest of investors in the growth opportunities provided by the rapidly changing makeup of the United States energy generation and supply.
- Electric merchants continue to set the low end of the range of multiples for sub-sectors within the power and utilities industry, dragged down by concerns including exposure to commodity price volatility and market/regulatory impacts.
P&U deals outlook
With the onset of the COVID-19 global pandemic in the first half of 2020, M&A activity in the P&U sector saw reductions in both deal activity and total deal value. Both deal volumes and deal values fell below historical averages. Various factors impacted the deal market in H1 2020 including short-term utility load/demand declines with shelter in-place restrictions and changes in working environments, broad commodity price declines, liquidity concerns and uncertainty in timing of recovery. As we progress into the second half of 2020, we expect pandemic related uncertainty to continue to impact the deal market; however, also expect opportunistic M&A activity to continue as industry participants look to rebalance and rationalize portfolios and deploy capital into attractive growth and yielding investments. Additionally, as seen in this half year, we expect renewables to continue to drive investment and deal activity in the sector as ESG focus intensifies along with the current timing of the phaseout and phasedown of federal tax credits driving current activity.
About the data
We define deal activity as mergers and acquisitions where targets are North American-based (US or Canada) companies or assets acquired by either US or foreign acquirers. Deal activity reflects unregulated power generation, electric and gas infrastructure, and regulated (electric, gas and water) transaction activity.
We have based our findings on data provided by industry-recognized sources. Specifically, values and volumes used throughout this report are based on announcement date data for transactions with a disclosed deal value greater than $50 million, as provided by Refinitiv and/or S&P Global Market Intelligence, and supplemented by additional independent research. Information related to previous periods is updated periodically based on new data collected by Refinitiv and/or S&P Global Market Intelligence for deals announced during previous periods, but not reflected in previous data sets. Unless otherwise noted, all data and charts included in this report are sourced from Refinitiv and/or S&P Global Market Intelligence.
Power and utility deals used in this report were developed using NAIC codes. In certain cases, we have reclassified deals regardless of their NAIC or SIC codes to better reflect the nature of the related transaction.
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