A major shift in global power M&A is taking place, ending a six year-long era of European dominance in power deals. The power deal world is heading in new and different directions that will lessen the impact of the euro zone crisis on deal totals, according to PwC’s annual Power Deals report released today.
The eurozone crisis is having a double-edged effect on deals. On the one hand it is constraining finance while on the other it’s expected to lead to deal flow. It’s prompting a flow of privatisations as governments sell power assets as part of their austerity measures. It is also leading to further currency weakness, strengthening the hand of overseas buyers.
Asia Pacific buyers and sellers were behind the largest number of deals in 2011 and any softening of valuations in Europe will likely reinforce their deal interest in the European marketplace, as well as the strength of the yen and renminbi against the euro.
Kameswara Rao, Leader Energy Utlities and Mining, PwC India, said: “The power and utilities M&A landscape is changing. The European companies are divesting in mature markets and to growth markets in emerging markets, while the Asia Pacific buyers are busy in Europe. For the first time, Asia Pacific buyers, mainly the Chinese and Japanese, accounted for the largest number of deals in a year, although much smaller in value and significantly down over the previous year. Indian entities are conspicuous by their absence in cross-border play and are missing out on these opportunities.”
In the last 12 months, Europe has recorded its lowest share of worldwide power deal value since PwC started analysing deal-making in the sector in 1999, with the total deal value in Europe plummeting 43% year-on-year to stand at US$39.8bn (from US$70.3bn the year before). However, this US$30.5bn
fall in power deal target value in Europe was more than made up for by a US$58.5bn increase in North America.
US power M&A is being fuelled by the need for scale among the big power utility companies and gas pipeline companies. New sources of shale gas are creating capital investment challenges as well as growth opportunities for gas pipeline operators, spurring deals among companies. Big gas pipeline deals accounted for US$47.3bn of the recent US$58.5bn year on year rise in North American power deal value.
A strong theme which is expected to intensify this year is European divestment programmes. The major European power utilities need to strengthen their balance sheets to make the big investments required in their core markets while retaining the flexibility to seek out growth markets. Eon and RWE are both planning major divestments in 2012.
The capital expenditure and growth challenges faced by European power utility companies are all the greater because of current constrained debt markets and more limited financing options. In a background analysis for the report, PwC looked at the leading European power utility companies and found:
§ On the debt side, issuances have declined from 75.6bn euros in 2009 to 14.6bn euros in 2011 as debt markets contracted.
§ In addition, across the whole European utilities sector, 15 groups have suffered downgrades in 2011 and 30% are on negative watch or facing downgrade reviews.
This reduction in capital- raising options will continue to spur divestments by the major European power utilities.
Kameswara further added: “Indian power developers are saddled with problems in home market. The challenges of coal shortage, pass-through of actual fuel costs, and ballooning counterparty risk issue need to be dealt with by firm regulatory and distribution reforms. There is little room to manoeuvre and private power developers have lesser funding options than in the past.
"FDI is seriously needed but will not come in unless regulatory and distribution reforms are more robustly introduced. The private sector is now more mature and competent and there is ample competition to expedite private participation in distribution. This will improve credit profile of the sector and bring in new sources of funding such as from sovereign wealth funds, infrastructure funds, and from overseas utilities investors seeking growth markets.”