|
|
Utilities
|
|
||
Surge in US utility deal activity to continue at steady pace Ernst & Youngfrom SNL Energy Finance Daily Surge in US utility deal activity to continue at steady pace Ernst & YoungByline: Darren Sweeney U.S. investor-owned utilities and power providers are expected to build on an increase in deal activity as they look to create leaner balance sheets and cleaner portfolios, a new report suggests. "There is an increasing appetite for M&A as several opportunities lay ahead lackluster growth prospects for gas LDCs, relative underperformance of small- to mid-size utilities and a sharpening focus on cleaner core businesses by utilities and non-utilities," Miles Huq, Ernst & Young LLP partner for strategy and transactions, wrote in the "Power and Utilities Transactions and Trends" report. The report, which analyzes global deal activity, shows an 85% increase in deal volume for the third quarter of 2020 compared to the previous three-month period. In the Americas, the U.S. represented about 75% of the estimated $15 billion in deal value in the third quarter, according to the report. "We did see a pretty significant sort of uptick in the power and utilities M&A market, which was actually far different from Q2 of 2020 when coronavirus first sort of shocked the system in mid-March," Huq said in a Nov. 19 phone interview. "Our observation, as we pointed out in the report, is these are very complex economic environments but the [power and utilities] deal theme is focused on simplicity." Ernst & Young, or EY, believes companies are looking to offload noncore, nonregulated businesses. "This isn't necessarily driven by distress, but rather management teams are proactively looking at their business and figuring out ways that they can be more disciplined and get rid of noncore businesses," Huq said. "They are also seeking to get a larger portion of their earnings from safer, regulated businesses, as well as contracted renewable projects. And so, this simplified business model, which focuses more around discipline within their core business that leads to a flexible and agile balance sheet is a theme and we are going to continue to see that over the course of the next several months." The "back to basics" concept has been playing out in the sector during multiple cycles, according to EY. "And so, when you have a lot of volatility and uncertainty in the markets, there is this flight to safety and having rate-regulated utilities that provide stable earnings, stable cash flows is where the investment cycle turns to during this type of environment," Huq said. "As a result, the companies that are getting rewarded in the financial markets on a total shareholder return basis are the companies that are larger cap [and] focused on rate-regulated plus renewable [investments]." The M&A playbook Public Service Enterprise Group Inc. is looking to reduce "overall earnings volatility" by exploring strategic alternatives for PSEG Power LLC's non-nuclear generation fleet and the PSEG Solar Source LLC portfolio. PPL Corp., Exelon Corp. and DTE Energy Co. also are among the utilities pursuing simplification through business sales or spins. "I think, if we look at the big picture, there are numerous value creation opportunities relative to M&A based on the transformational aspect that is ahead of us in the power and utilities sector," Huq said. "There are considerable earnings growth opportunities associated with renewables. I think we know that." In addition, EY sees the market reward for stable regulated returns likely leading to widespread adoption of a similar strategy. "Undoubtedly, M&A in the sector can drive economies of scale for cost efficiencies. It can definitely strengthen your core geography or it can allow you to expand into other geographies, so that you can diversify your portfolio," Huq added. "It also enables the expansion into new technologies and operational capabilities that can nicely align with integrated resource plans. These are all value creation opportunities in the sector on the back of M&A. As a result, I do expect to see that continued trend over the next several months." Gas LDCs losing 'flavor' The industry consultant expects gas distribution companies to emerge as prime targets in the market. CenterPoint Energy Inc. is looking to offload one or two of its regulated gas utilities and use proceeds to fund a $3 billion increase to its 2021-2025 capital spending plan. "If you looked at gas LDCs going back 18 to 24 months ago, they were trading at really high multiples, only second to water utilities," Huq said, adding that gas distribution companies have since "lost a lot of flavor in the market." "As a result, I do expect to see multi-utilities look closely at their portfolio of electric and natural gas businesses and as a result, we are going to see more divestitures because some of these assets could be better placed in private capital hands, such as infrastructure funds," Huq said. "They produce regulated earnings and cash flows, but if the public markets don't favor them, they could be better positioned with private equity infrastructure funds and that theme I think will continue over the next several months." EY contends there could be continued interest in a mega-merger with recent market speculation potentially sparking transactions. Wall Street analysts, by and large, threw cold water on speculation that NextEra Energy Inc. would acquire Duke Energy Corp. to create a "mega-utility" with a market capitalization of more than $200 billion. Just weeks later, reports emerged that NextEra made a $15 billion all-stock bid for Missouri utility Evergy Inc. "There is this sense of urgency, I would say, that we are seeing not only in NextEra but other power and utility companies of this mindset of 'use it or lose it,'" Huq said, pointing to companies looking to support their growth plan through efficient use of their balance sheet, cash on hand and access to capital. "Let's use these tools and make some strategic bets because the sector is going through a transformation toward renewable and clean energy." |
return to message board, top of board |