Power & Utilities Capital Confidence Barometer: November ... · the global economy is improving —...
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Transcript of Power & Utilities Capital Confidence Barometer: November ... · the global economy is improving —...
Capital
Key global
of companies expect to actively pursue acquisitions in the next 12 months
of companies currently have three or more deals in their pipelines
increase in appetite for upper-middle-market deals
of companies intend to pursue acquisitions outside their own sector
of companies have increased their intention to acquire in the eurozone
1
Companies embrace sustainable M&A as deal markets generate renewed growth
of power and utilities executives are looking to expand beyond the sector in response to disruption to traditional business models
the global economy is improving — a new high
of power and utilities executives are using research and development (R&D) and innovative technology to drive growth strategies
of power and utilities executives intend to actively pursue acquisitions — up 30% from two years ago
Changing customer behavior and quest for advanced capabilities to drive M&A
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high with 81% of P&U executives viewing the economy as improving. This rising optimism stems from easing global
anchoring economic recovery in the eurozone. While the US gross domestic product (GDP) growth beat estimates in the
Q3 2015 suggest a fall in the growth rate at around 1.5%.1
market indicators. Quantitative easing in the eurozone and
in China continue to boost credit availability. The US Federal 2
outlook also remains positive.
Concerns over volatility in commodity prices remain as analysts
fall to as low as US$20/barrel.3
East are also a key economic risk for P&U executives. Utilities have expressed apprehension about the uncertain political and
slowing economies in some other eurozone countries and the effects of the Syrian refugee crisis all pose risks for the region.
1 https://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp3q15_adv.pdf
www.cnbc.com/2015/10/26/rbs-michelle-girard-q3-gdp-wont-be-good-on-surface-but.html
2 www.businessinsider.in/The-Federal-Reserve-says-the-economy-is-humming-along/ww.bloomberg.com/news/articles/2015-10-13/it-s-
quantitative-easing-europe-but-not-as-we-ve-known-it
3 www.theguardian.com/business/2015/sep/11/goldman-sachs-says-oil-could-fall-to-20-dollars-a-barrelSeptember 2015.
Q:
Q:
Q:
4% 1%Oct 15
81%
14%
Apr 15
72%
27%5%
Oct 14
45%
51%
Improving DecliningStable
Oct 15 Apr 15 Oct 14
Equityvaluations
Short-termmarket stability
Creditavailability
Corporateearnings
68%
45%
56%
44%
71%66% 67%70%
65%
74%
53%53%
Increased global andregional political instability
Increased volatility incommodities and currencies
Economic and politicalsituation in the eurozone
Slowing growth in keyemerging markets
Timing and pace of interestrate rises in the US
26%
15%
7%
26%
26%
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cost scrutiny. The majority of our survey respondents (55%)
34% of P&U executives are prioritizing growth over the next 12
factors. These include ongoing economic and market pressures
sector transformation to determine appropriate business models and growth strategies moving forward.
Oct 15
Oct 14
Apr 15
Maintainstability
Cost reduction andGrowth Survival
34%
27%
8%
12%
13%
55% 3%
58%
38% 49%
3%
Q:
continue to challenge utility business models. Many utilities are in the process of reviewing or transforming their businesses in response to these disruptions.
A large percentage (68%) of P&U executives plan to leverage technology and increase R&D to develop new products and services and drive innovative growth.
Europe alone present a US$220b revenue opportunity.4
also offers an increasingly viable option for addressing the reliability and intermittency challenges of renewable power. A number of utilities across the globe are already trialling energy storage systems on their networks.
Grid modernization and smart meters are creating data-driven
and services are being developed to enhance customer experiences.
Enel and Germany’s RWE are rolling out advanced energy management and connected homes technology to their
includes smart lighting and security products that can be controlled through smart phones.
Q:
Oct 15 Oct 14 Oct 13
Conventional
Innovative
y
Increase research anddevelopment/product
introductions
Exploiting technologyto develop new
markets/products
Investing in newgeographies/markets
Changing mix of existingproducts and services
20%
23%
20%
3%
0%
0%
10%
25%
10%
10%
More rigorous focus oncore products/
existing markets
New sales channels
19%
20%
13%
15%
14%
43%
10%
45%
Renewable generation and behind-the-meter services will be key levers of organic growth.
4 Navigant Research.
P&U companies are taking a balanced approach to their capital agendas. Improving the balance sheet by reducing debt is a key capital allocation consideration for P&U executives. Utilities are exploring options to
numbers of utilities are investing in enterprise management technologies to streamline their processes.
based analytics solution to improve decision-making around asset management.5
start-ups to foster innovation.
5 http://corporate.vattenfall.com/press-and-media/press-releases/2015/vattenfall-outsources-parts-of-it-operations/
capabilities
Capi
tal a
lloca
tion Utilities balance innovation and
Q:
Q:
Improve balance sheet by reducing debt
Organic growth (e.g., investing in products,talent retention, research and development)
Inorganic growth (e.g., acquisitions, alliances and JVs)
Returning cash to shareholders
26%
27% 32%
15%
15%60%
25%
Evolving core products and servicesEntirely new products and services/true innovation
15%
26%
59%
Time resources Capital resources
9 | 9
Boar
droo
m a
gend
aMarket volatility continues to dominate boardroom agenda
power generation fuels for most utilities. Price movements in these commodities directly affect utilities’
reduction initiatives are becoming mainstream processes rather than one-off initiatives for utilities. For
renewables and networks.6
Advances in digital technology are disrupting the customer end of the utility value chain at an accelerated rate. Smart meters have enabled both utilities and their customers to gain a better understanding of energy
revolutionizing the way utilities and customers transact. Digitization will occupy an increasingly central place in utilities’ core business and acquisition strategies as they strive to stay relevant in a continuously evolving P&U
in a bid to enhance their service offering and customer base ahead of retail competition in 2016.
attracting interest from utilities.
Q:
Top two responses
Acquisition strategyCore businessGlobal marketplace
Digital future21%
24%
21%
24%
Q:
6
M&A
11 |
Q:
Q:
The appetite for acquisition among P&U companies has steadily increased since 2013. More than half (58%) of respondents expect their company to actively pursue acquisitions in the next
This increased appetite for dealmaking comes as P&U executives
quantity and quality of acquisition opportunities. Survey results
acquisition opportunities (up from 34% a year ago). Oct 13 Apr 14 Oct 14 Apr 15 Oct 15
28% 31%
45%
58%
40%
Expectations to pursue an acquisition
Apr 15 Oct 15Oct 14
Qualityof acquisitionopportunities
Numberof acquisitionopportunities
Likelihoodof closing
acquisitions
71%
50%
34%
67%
73%
50%
34%
34%
47%
% of positive attitudeDeal metrics
M&A market will improve in the next 12 months. This expectation follows a brief period of relatively low activity in
of US$50.9b.
high. Fifteen billion-dollar-plus transactions — including three deals over US$10b — were reported in the quarter.
Q:
Stable
Declining
Improving
23%
49%
27%
1%
1%
4%
69%
50%
76%
Oct 14 Oct 15Oct 13
Promising year ahead for M&A
expect to complete more deals in the next 12 months than
M&A activity to continue at a similar level. Eighty-three percent of the respondents indicated their intention to
are planning to accelerate their activity by completing three or more deals.
We expect corporate mergers focused on regulated assets and renewables build out to support M&A momentum in
privatizations encouraging utilities to explore inorganic growth in these markets. Deal activity in Europe is likely to
reforms in Eastern Europe will open up opportunities. The
of energy mix in the Middle East are expected to attract investment into these regions.
The current deal pipeline looks promising. Nearly 39% of P&U
18% have more than four deals in the pipeline. This is likely because of buyers evaluating multiple deals in the Americas
While our survey results reveal 28% of respondents expect
majority (69%) do not expect any change in their current pipeline.
Q:
5
4
3
2
1
Oct 15Apr 15Oct 14
3%3%
9%
39%9%
26%43%
32%
21%24%
17%
35%
6%
21%12%
Q:
5
4
3
2
1
Number of planned acquisitions in the next 12 months
9% 27%
38% 66%
45%
0% 17%
8% 28%
Q:
Q:
Oct 15
Apr 15
Oct 14
Increase No change Decrease
22%44% 34%
31%63% 6%
16%
69%28% 3%
Stay the same
LessMore
34%63%
3%
ensure a healthy pipeline of deals.
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Stable valuations to fuel deal activity
The hunt for stable investment returns and the capex/rate base growth opportunities offered by regulated transmission and distribution (T&D) assets continue to drive premium valuations for this segment. For commodity-exposed power generators and independent power producers
weighing on valuations. Leading US yieldcos have also underperformed stock markets over the last six months.
of the current valuation gap (between buyers’ and sellers’
as being somewhat higher (10%–25%) while 42% describe it
higher (>25%). While current high valuations may deter some
assets and regional opportunities presented by energy
are likely to offset downside risk.
the price/valuation of assets to remain stable over the next
more than a quarter (28%) of P&U executives see this equity correction as temporary and expect the price/valuation of assets to improve over the next 12 months.
Q:
The gap is small (<10%)
Somewhat higher (10%–25% gap)
49%
42%
11%
47%
Q:
Contract
Stay the sameWiden
7%
59%34%
Q:
Decrease
Remain at current levelsIncrease
12%
60%28%
M&A opportunities are not limited by current high valuations and stock market corrections.
Focus continues on lower and middle-market deals
Q:
Q:
Utilities plan to focus on lower and middle-market deals as
energy services and behind-the-meter services to their existing portfolios.
Renewables and energy services deals have formed more than 42% of the middle and lower market deals to date in 2015. As new businesses start to mature and are consolidated
see these assets move into the middle-market category. It is
the majority of which occurred in the Americas.8
Despite the increased focus on R&D and innovative
preferring acquisitions that complement their existing
respondents indicated that their planned near-term M&A
innovative investments (potentially into other industry
high-value acquisitions.
18%
79%
Greater than US$1bUS$251m—US$1b Less than US$250m
3%
19%
75%
6%Oct 14 Apr 15
28%
72%
Oct 15
78%
8%
14%Bolt-on (complements current business model)Innovative investment (shifts scope of your business — could be into another industry sector)
Transformative (high-value acquisition that signi cantly changes the size and scale of your company)
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Q:
Regulatory hurdles and competition form top reasons for deal failurecanceled or failed to complete a planned acquisition in the
deals carefully and are willing to walk away.
Regulatory or anti-trust concerns and competition from buyers are the primary reasons for deal cancelation or
of heightened scrutiny from regulatory and competition
Utilities Regulatory Authority of Connecticut due to a lack of
Commission on the basis that it was not in the best interest of
reconsider the respective proposals after Iberdrola and Exelon took steps to address the concerns raised.9
the key reasons for disappointment tend to be revenue/
integration. As utilities venture into acquisitions outside
deals are to meet expectations. Q:
Poor execution of integration
Poor operating cost assumptions
Product/sales price andmargin deterioration
Failure to achieve synergies
Sales volume declines/loss of customers
Strategic value overestimated/purchase price multiple too high
Unforseen liabilities(tax, HR, pension, etc.)
17%
12%
8%
4 %
19%
21%
19%
Q:
Concerns about regulatoryor anti-trust reviews
Issues uncovered duringdue diligence
Competition fromother buyers
Investor or board scrutiny
Gap between buyer andseller expectation too wide
8%
13%
28%
21%
30%
www.bloomberg.com/news/articles/2015-06-30/iberdrola-s-3-billion-takeover-of-uil-rejected-by-
http://www.utilitydive.com/news/good-news-for-exelon-dc-regulators-vote-to-evaluate-pepco-merger-settlemen/408168/
Changing sector landscape drives utilities
Advances in technology are disrupting the sector across the value chain. Continuous improvement in
grid technologies are revolutionizing the T&D segment.
Arguably the greatest level of disruption is happening in the retail space where customer behavior is continuing to change. The pervasiveness of social media means that customers are now better informed
change the retail business landscape. A number of utilities are responding to this transformation by
partnered with Google’s Nest to deliver energy management services to their customers. Several large
appliances companies to pilot new capabilities such as grid-scale energy storage and connected homes.
energy markets to competition in order to attract foreign and private investment. Reform initiatives in key
after opportunities for global P&U players.
The oil and gas sector is the acquisition focus for 8% of respondents. The primary drivers are reduced revenues from energy delivery businesses and increased volatility in global oil and gas prices. Another
55%
24% Governmentand public sector
8% Technology
8% Oil and Gas
14% Other sectors*
45%55%
Not planning an acquisition outside of my own sectorPlanning an acquisition outside of my own sector
Q:
Sect
or d
isru
ptio
n
Utilities are responding to transformation by acquiring
partnerships or acquisitions.
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Sect
or d
isru
ptio
n
to restructure business models
Industry regulation
Increased globalization
Changing customerbehavior and expectations
Other
Sector convergence/increase competitionfrom companies in other sectors
Product innovation
Advances in technologyand digitalization 12%
11%
6%
2%
18%
31%
20%
Q:
dynamics of a utility market and its participants. About one-third (31%) of the survey’s P&U respondents say they expect industry regulation to be the sector’s most disruptive factor over the next 12 months.
regulation beyond rates and revenues to include social and environmental performance. The proposed
capacity retirements as investment in renewable energy increases. The outcome of the United Nations’
also likely to result in policy and regulatory responses.
Increasing globalization and sector convergence are also disrupting traditional utility businesses. Utilities
in renewable power generation assets. Google has also entered the energy services market through its
Changes in customerbehavior
Technology anddigitalization
Access to new materials orproduction technologies
Reacting to competition
New product innovation
3%
18%
24%
24%
31%Q:
while maintaining focus on home markets
Q:Utilities indicate a balanced approach to their M&A strategy
markets. Sixty-three percent of P&U executives say that the main focus of their M&A strategy is beyond their domestic
18%).
Recent M&A data shows that utilities are looking for
foreign and domestic markets.
Domestic market (home country)
Immediate region (countries close to home)
Outside domestic market/immediate region
37%
29%
34%
Preferred investment destinations are closer to home
market/immediate region
Immediate region (countries close to home)
Domestic market (home country)
Africa and Middle
East
North America
Latin America
Western Europe
Eastern Europe
Strong economic growth and high-quality assets of top tier developed markets attract investment capital from P&U companies. China remains attractive despite slowing growth.
19 |
Q:recent slowdown in key emerging markets seems to be playing on the minds of P&U investors who named the developed
preferred investment destinations. Government reforms in
in Germany are attracting investor interest in these markets.
interest despite slowing economic growth.
of all P&U respondents planning to allocate at least 10% of their acquisition capital to these regions. The proportion of respondents planning to invest more than 25% of their acquisition capital in emerging markets has increased from 9%
Investment capital directed toward key developed markets
1. Australia 2. Germany 3. United States 5. China
11%
5%12%
9%
0%8%
29%
47%43%
36%
Above 50%
25%—50%
10%—25%
Less than 10%
None
Apr 15 Oct 15
Top M&A markets and their key characteristics
Brazil’s P&U sector continues to offer investment opportunities as the government focuses on securing
transmission infrastructure and increasing investment in distribution. The recently announced Power Investment Program foresees investments of US$53b in new power generation and transmission projects through public auctions to be held between August 2015 and December 2018. The program aims to add 25 GW–31.5 GW of generation capacity
opportunities for investment. The market is already attracting interest from investors as demonstrated by SunEdison’s announcement to acquire Renova Energia’s hydro and wind energy assets for US$5b and Cemig’s plans to acquire power generation and transmission assets in the country.11
Reforms and distributed generation see the Australian P&U deal market set for a
is rising as the regulator considers a gas
for participants. Competition for NSW electricity assets is also heating up with four consortiums in the running for the State’s transmission assets.
Rooftop solar and battery systems are
costs are tipped to drop lower than that of grid electricity. Bloomberg New Energy Finance projects that the capacity of battery storage and solar photovoltaic
impact the valuations of grid companies.
The Australian parliament has set the Renewable Energy Target (RET) for large-
should spur investments. 10
Despite moderating economic growth
China remains an attractive M&A market. Consolidation remains the biggest theme
companies eyeing mid- and small-cap companies that provide larger customer bases and higher revenues — we expect this trend to continue. Reforms and government investment in infrastructure will also continue to provide impetus to the private sector investment. The government has recently announced plans to spend around US$315b on improvements to power grid infrastructure over the 2015–2020 period. These will include increasing the total length of its high-voltage transmission lines to 1.01 million km by
2014 level. The government has already expanded direct power sales to seven cities
add more cities as part of a pilot program.
as part of government reforms aimed at removing electricity pricing controls.12
grid-power-in-australia/ www.theguardian.com/environment/2015/nov/02/clean-energy-investment-in-australia-fell-by-31-under-tony-abbott www.afr.com/business/energy/australia-will-promote-more-renewable-energy-says-hunt-20151101-gkof9c#ixzz3qQN4yuI3 www.cleanenergycouncil.org.au/policy-advocacy/renewable-energy-target.html
http://news.xinhuanet.com/english/2015-08/12/c_134509268.htmwww.windpowermonthly.com/article/1356499/renova-energia-sells-projects-sunedison
www.reuters.com/article/2015/09/01/china-power-transmission-www.bloomberg.com/news/articles/2015-09-16/
china-will-set-up-power-trading-platform-in-move-to-free-prices
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Despite the Department of Energy and Climate moving to moderate its support for renewables through an early end to
and a planned reworking of the feed-
continues to be one of Europe’s favored investment destinations. The country’s appeal is boosted by its continued strong growth performance — with 2.6% growth in Q2 2015 year over year
quarters of sustained economic growth.
for solar and onshore wind is likely to boost investor interest in offshore wind. The government will also continue its efforts to enhance competition and foster investment in the power market. The ongoing Electricity Market Reform is expected to attract £110b (US$168m) of investment into electricity infrastructure.14
renewable and regulated T&D assets continues to drive investments in the P&U sector. While some European countries have moved
Germanys’ plans to start shifting coal power to reserve in 2016 is keeping the renewable agenda well
Network Agency approved 33 new
round of state tenders. With more renewables powering the grid than
to serve as backup to keep the grid stabilized. Utilities are moving fast to optimize their asset portfolios toward new technologies and regulated
generation assets off their balance
German lignite generation and mining
signal of things to come.13
The US remains a key M&A destination as the increasing pressure of environmental costs and reducing load growth drives further acquisitions of quality regulated assets (primarily
registered eight billion-dollar-plus
country’s strongest quarter of the last six years. Premiums offered on regulated assets continue to set new
are willing to pay for quality assets
and long-term growth. In coming
in renewables to gather pace as states start discussing options to comply with
through their acquisitions of long-term contracted renewable and natural gas
ongoing contraction in yieldco equity valuations is likely to push up the cost of capital and induce a greater discipline in M&A transactions.15
www.pv-magazine.com/news/details/beitrag/33-successful-bids-in-second-german-pv-tender_100020598/#ixzz3ow2inoa8
www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2015/stb-gdp-q2.html www.gov.uk/government/publications/2010-to-2015-government-policy-uk-energy-security/2010-to-2015-government-policy-uk-energy-security
Cybersecurity due diligence forms key part of M&A process
Q:
AlwaysSometimesDon’t knowNever
49%39%
7% 5%
Between signing and closingAs part of the core diligence processJust prior to announcement
57%35%
8%Q:
Digital technology is becoming pervasive in the P&U sector. Automated technology such as supervisory control and
diligence processes most impacted.
serious implications for utilities’ operations and reputation. Attacks on SCADA systems could severely affect the operation of the utility’s entire power infrastructure. Breaches to utility data servers put customer data under high
Identifying and managing these cybersecurity risks is essential in any transaction. Unanticipated cyber risks have
While nearly half of the utilities surveyed always take steps to counter this risk by always performing cybersecurity
breach will negatively impact the transaction. It is also essential that the due diligence process includes a thorough assessment of the target company’s cybersecurity risk management plan to ensure it offers appropriate protection against potential attacks.
Q:
Sourcing and selectingopportunities
Duediligence*
Post-mergerintegration
There has beenno impact
12%16%37% 35%
Q: 11%44% 45%
LowMediumHigh
Cybe
rsec
urity
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Abo
ut th
is s
urve
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