Global power sector M&A showing signs of recovery

Global power and utility deal volumes reached a three-year high in 2013, with deal values reaching $125.4bn, new analysis has found.

EY’s latest Power Transactions and Trends: Global Power and Utilities Mergers and Acquisitions report found worldwide M&A activity showing signs of a significant recovery in 2013 after 2012’s slump, with deal volume up 30.1 per cent and deal value up 4.1 per cent on the previous year. EY M&A deals

The report said the volume of deals was driven by several key factors, including industry consolidation as smaller firms were acquired and asset rebalancing on the part of larger firms, all against a backdrop of low wholesale prices and excess capacity.

Utilities in many developed markets have taken the decision to rebalance in response to low expected returns. In particular, European firms announced cumulative divestments of $30 billion in 2013. Interestingly, much of the resulting capital was funnelled not into home markets but into the emerging markets of Eastern Europe and Latin America.

In fact, cross-border M&A activity remained strong worldwide, the report found, with Japanese investments in Europe a major example. China’s state-owned utilities expanded into Australia, while Germany’s E.ON continued its expansion in Brazil; in North America, Canadian companies pursued opportunities in the US. In particular, investors in China, the US, the Middle East and Japan are looking to invest in higher-yield markets, EY said.

Last year also saw utilities branching out into new business areas such as energy efficiency and energy management services, in response to low wholesale prices, weak energy demand and an influx of renewable power – what analysts have termed the utility ‘death spiral’.

EY predicts that current trends will continue throughout 2014. Cross-border deals will dominate the year and industry consolidation, market reforms and continued opportunities in developing countries, where infrastructure buildout and capacity expansion are driving markets, will continue as key drivers.

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