2017: a year of political uncertainty but deal fundamentals are set to trump the politics, says PwC

Published at 00:01 AM on 26 January 2017

Total M&A deal value in the power and renewables sector is running at the highest level in the current decade, according to a new report from PwC. But what’s in store for 2017 in a year of political uncertainty and changing economic conditions?

With the advent of a Trump presidency as well as key elections in Europe, Norbert Schwieters, global power and utilities leader, PwC observed:

“2016 has been a bumper year but the outlook is more clouded for 2017. On balance, we believe the fundamentals of deal making in the sector will outweigh the political uncertainties. Investor appetite for the steady long-term yields that flow from regulated power and gas infrastructure assets will continue to attract strong investor interest with upward pressure on acquisition premia.

“There are uncertainties about climate change politics arising from the Trump presidency but, increasingly, the economics and momentum behind decarbonisation and wider energy change are eclipsing the politics.”

Power and renewables deals worth US$293bn were announced in 2016, up 47% year on year from US$199bn in 2015. US$87bn of the US$94bn rise in deal value has come from North America. Deal value in North America rose to an all-time record level of US$167bn in 2016. But, alongside that, there were also increases in Australasia, Europe and Latin America.

Across the sector, there were notable trends:

  • Strong demand from institutional buyers and infrastructure funds with purchases by these sources nearly doubling, from US$37bn in 2015 to US$65bn in 2016.
  • Deal value involving infrastructure funds alone rose fourfold, from US$7bn to US$31bn.
  • Renewables deal volume has stayed level but renewables deal value fell from US$55bn to US$38bn due partly to a number of large hydropower deals in the previous year comparison.

The report highlights eight themes that will characterise power and renewables deal activity in the year ahead.

Andrew McCrosson, partner, PwC power and utilities, commented one of the biggest deal areas:

“It’s been a strong year for sales of network infrastructure and other assets underpinned by steady, predictable and often inflation-hedged regulated returns. 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.”

Rob McCeney, partner, US power and utilities, PwC, said:

“North American power and renewables sector M&A deal value is running at record levels. Looking ahead, expectations suggest the new presidency will focus on stronger growth, but with upward pressure on interest rates, this will likely put pressure on historically high valuations, causing some utilities to focus on balance sheet strengthening and others to look to build further scale through acquisition.”

Much of the rise in US deal value is coming from an increased role for gas in the energy mix and pressure for consolidation in the pipeline sector.

Jeremy Fago, principal, US power & utilities deals leader, commented:

“We don’t anticipate these deal motivations will be diluted by a Trump presidency. Indeed, gas could be boosted if Trump presidential policies follow the campaign dialogue in favour of more gas production and infrastructure (e.g. pipeline) development and, while there may be a slowing of retirements of coal generation, the overall trend towards a changed energy mix is likely to continue.”

In the Asia Pacific region, China and Australia has provided much of the momentum for deal activity and this is expected to continue to be the case in 2017. Andy Welsh, Deals Power & Utilities Leader, PwC Australia, observed:

“We expect China and Australia to continue to provide much of the power and renewables deal momentum in 2017. Mega deals are on the cards in Australia with the definite 50.4% sale of New South Wales government-owned electricity distributor Endeavour Energy and the possible IPO by Western Australia of electricity network Western Power. Chinese buyers have been prominent buyers of Australian assets, prompting new guidelines on foreign investment. The first test for the foreign investment review board will be the proposed acquisition by Hong Kong-based Cheung Kong Infrastructure of gas infrastructure company Duet Group.”

Further afield, Chinese and Asian buyers remain very active buyers of power assets in the Americas and Europe as well as within Asia. State Grid Corporation of China is expected to use its US$8.7bn purchase of Brazil’s CPFL Energia as a channel for further stakes in South American distribution and transmission infrastructure.

Ends.

Notes to Editor:

To view the report - Power & Renewables Deals 2017 Outlook and 2016 Review - as well as some of the global deals data, visit the web page via www.pwc.com/power-deals

About PwC - PwC helps organisations and individuals create the value they’re looking for. We’re a network of firms in 157 countries with over 195,000 people who are committed to delivering quality in assurance, tax and advisory services.

Tell us what matters to you and find out more by visiting us at www.pwc.com.

©2017 PwC. All rights reserved.

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity.

Please see www.pwc.com/structure for further details.

Ends.


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About PwC

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. © 2016 PwC. All rights reserved

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