Power sector M&A soared to new record levels in 2007, despite the effect of the credit crunch. The latest edition of Power Deals, the annual review by PricewaterhouseCoopers of power sector M&A, shows a 25% year on year increase, with the worldwide 2007 power deal value of US$372.5bn nearly nine times above the US$43bn recorded just four years earlier in 2003. Records continue to be set in the sector for the total number and value of deals and for the size of individual deals. There was no evidence of a fall-off in deal activity as the credit crisis broke. Some 57% of all power sector deals, 441 of the total 768 deals in 2007, came in the second half of the year. Indeed, the number of final quarter deals in 2007 was 73% up on the final quarter of 2006 and final quarter total value was 21% up. Manfred Wiegand, global utilities leader, PricewaterhouseCoopers commented: “Momentum in the sector was not noticeably hit by the credit crunch. We will eventually see some impact but many corporate players have cash to invest. Investor appetite for the sector is likely to remain relatively favourable and the basic imperatives of non-organic growth and the need to secure and diversify fuel sources in an era of scarce energy cannot be ignored.” Despite the headlines created by cross-border deals such as Enel’s move for Endesa, it was domestic electricity sector M&A that set the totals on fire. The total value of domestic electricity deals nearly trebled, from US$73.4bn in 2006 to US$208.8bn in 2007. The surge in electricity deals was so huge that it catapulted the power utilities sector as a whole to record highs despite a US$82.5bn fall in gas deals. Total gas deal values fell 77% to US$24.2bn in 2007, due to the absence of the gas mega-deals that were a feature of 2006. There were fewer mega-deals, reflecting the complexity of getting very large deals over the political and regulatory hurdles in both the US and Europe. There were two US$20bn plus deals in 2007 compared to four such deals in 2006. This change in mega deals represented a US$43.7bn reduction in year-on-year deal value but was more than offset by increases in the numbers and total value of smaller deals. Momentum was strong across all territories. Unprecedented deal activity saw deals reach new highs in North America, Asia Pacific, the Russian Federation and, in terms of targets, South America. Europe recorded a significant year-on-year fall in gas deal values although, even here, electricity sector deal activity was intense and, again, set new records. Worldwide, the appetite of infrastructure funds for power assets continued undiminished during 2007. Bids by infrastructure funds rose 60% from US$52bn in 2006 to US$83.4bn in 2007 and accounted for over a fifth of all power deal bids. Europe remains the location for the greatest amount of deal activity but we are seeing strong momentum in all the other main markets. The gap between Europe and North American players in terms of the value of transactions is narrowing. In 2006, European players moved for US$190.6bn worth of targets as against US$54.5bn by their North American counterparts. In 2007, this US$136.1bn chasm had halved to a US$71.6bn gap. Nonetheless, the respective levels of activity remain a long way from the situation in 2004 when North American bids and targets outstripped those in Europe. Spurred by restructuring of its power sector, the volume and total value of deals involving companies in the Russian Federation reached significant levels in world-wide terms for the first time. From just 2.5% of world-wide bidder value in 2006, bids by Russian Federation entities rose from US$7.5bn to US$64bn or 17.2% of all 2007 deal values. Virtually all of the Russian deal activity was inside Russia although 2007 saw Gazprom’s second purchase of a UK gas distribution company, reflecting the company’s aim of reaching further afield downstream. Moving in the other direction, E.ON made its first large investment in the Russian electricity sector with the US$8.4bn purchase of the OGK-4 power generator and Enel also made significant investments. The extent of this Russian-European interplay will be a key focus of attention in the year ahead. Manfred Wiegand, global utilities leader, PricewaterhouseCoopers commented: “The coming year will bring some uncertainty, not least with an election year in the US and Russia and the turmoil in the credit markets, but power sector M&A deal-makers will be mindful of continuing strong fundamentals. The credit squeeze will have an impact on the value and volume of deals. Raising debt finance to fund acquisitions is now more complex in every market because of worries about the carrying value of assets and businesses that are being purchased. There may be an influence on bigger, highly leveraged moves by private equity players but the fundamentals of the sector remain in place.” Power Deals 2007 also includes a focus on the key regional markets:Europe A fall in gas deals dragged total power deal value in Europe lower in 2007 compared to 2006 but European electricity M&A activity continued to break all the records. The number of European electricity targets in play was up by 21%, from 161 in 2006 to 195 in 2007. Target electricity values rose 12% to US$131.3bn. European bidder activity in electricity rose even more, by 21% from US$128.4bn in 2006 to US$155.5bn in 2007, with bidder numbers up from 175 to 215. The vast majority of activity was by European corporate utility bidders as utility company consolidation continued. Mark Hughes, European utilities leader, PricewaterhouseCoopers, said: “Alongside the considerable consolidation moves inside Europe, we saw a number of expansionist moves by European utilities and Asia Pacific did not escape European attention either with a number of deals from financial players. Looking ahead, the strong euro is going to reinforce this momentum and there are enough companies with strong balance sheets and international ambition for us to expect these moves to continue. However the recent quite staggering levels of deal activity, given the credit crunch and the extent of consolidation already realised in the European market, are unlikely to continue.” North America North American bid activity revived following a lull in 2006. However, the headline 61% increase overstates the underlying year on year story for corporate utility companies. The bid totals in both years were increased by big moves by financial players – the US$21.6bn infrastructure fund bid led by GS Capital for Kinder Morgan in 2006 and the US$43.8bn private equity move by KKR, Texas Pacific and Goldman Sachs for TXU in 2007. Excluding these two mega-deals, bids by North American entities nonetheless rose 33% from US$32.9bn in 2006 to US$43.7bn in 2007. Regulatory uncertainty continued to overhang the market for deals. Perhaps reflecting this, M&A flows from foreign entities declined considerably – down by 62% from US$40bn in 2006 to US$15.2bn in 2007. However, within this smaller total, there were a number of notable moves from European entities for US renewable assets. John McConomy, US power and utilities transaction services leader, PricewaterhouseCoopers, commented: “Looking ahead, the election year is likely to prompt some pause for thought from potential regulatory and legislative actions, but there are a host of European companies with global ambitions who will be mindful of the opportunity presented by the current strong euro. Similarly, US assets will continue to get the attention of the Australia-based infrastructure investors and, again, dollar weakness will add to this interest. There are many questions which will remain unanswered until after the election but, in the meantime, domestic and global companies will not want to miss opportunities to satisfy Wall Street’s appetite for growth.” Asia Pacific The total value of deals for Asia Pacific assets continued to chart the ever upward path of recent years. Total 2007 target deal value rose to US$50.4bn, up from US$34.7bn in 2006. Gas deals accounted for the increase in total power deal value. Total gas asset target value leapt – to US$16.3bn in 2007 from US$9.3bn in 2006 and US$3bn in 2005 – with the rise wholly accounted for by a single deal for Australia’s Alinta. Much of the deal-making in the region was by Australian entities. This single country accounted for US$19.4bn (41%) of all Asia Pacific power deal bidder value in 2007 compared to US$20.7bn (50%) in 2006. Behind Australia, Chinese and Japanese bidders accounted for US$10.4bn (22%) and US$3.2bn (7%) of deal activity in 2007. Derek Kidley, Australasia energy and utilities leader, PricewaterhouseCoopers, commented: “The prospects for continuing high levels of M&A in the Asia Pacific market remain strong. Outside investor interest in the region remains high with the region offering higher than average growth prospects. The trend to consolidation is still in the relatively early stages in many parts of the region and the Australian market is set for significant activity with a stream of privatisations scheduled for the next 18 months or so. One issue is in China where a recent government order to freeze the power tariff, as well as selected utilities prices, is likely to present a disincentive to deal activity.”
Notes to Editors:
1. Cross-border deal activity is defined as acquisitions across territory, with domestic acquisitions referenced as within home markets. 2. 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 2007. 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 2007 and for 2006, 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 2007 is available by visiting the Power Deals website at www.pwc.com/powerdeals 3. The Global Energy and Utilities group (www.pwc.com/energy) is the professional services leader in the international energy and utilities community, advising clients through a global network of fully dedicated specialists. Our team of energy sector specialists can support clients in assessing the practical implications of EU Energy and Competition policy on your business and in identifying strategic, regulatory and implementation opportunities.
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