Total mergers and acquisitions deal value in the power and renewables sector is running at the highest level in almost a decade, according to a new report from PwC. And this upward trend is set to continue for the foreseeable future despite political and economic uncertainties in the US and Europe, according to NORBERT SCHWIETERS, global power and utilities leader with PwC.

Total mergers and acquisitions deal value in the power and renewables sector is running at the highest level in almost a decade, according to a new report from PwC. And this upward trend is set to continue for the foreseeable future despite political and economic uncertainties in the US and Europe, according to NORBERT SCHWIETERS, global power and utilities leader with PwC.

“2016 was a bumper year but the outlook is more clouded for 2017”, he says. “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 premiums. 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$293 billion were announced in 2016, up 47 per cent year on year from US$199 billion in 2015. US$87 billion of the US$94 billion rise in deal value has come from North America. Deal value in North America rose to an all-time record level of US$167 billion in 2016. But, alongside that, there were also increases in Australasia, Europe and Latin America.

Power and renewables deals worth US$293 billion were announced in 2016, up 47 per cent year on year from US$199 billion in 2015

There were other notable trends across the sector. There has been strong demand from institutional buyers and infrastructure funds with purchases by these sources nearly doubling, from US$37 billion in 2015 to US$65 billion in 2016. Deal value involving infrastructure funds alone rose fourfold, from US$7 billion to US$31 billion. And while renewables deal volume stayed level, deal value actually fell from US$55 billion to US$38 billion due partly to a number of large hydropower deals skewing the 2015 figure somewhat.

The PwC 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 premiums, 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.”

The Trump presidency will have some impact according to Rob McCeney, partner, US power and utilities with PwC. “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. The report contends that this activity could actually be boosted by the new administration. “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.

“We expect China and Australia to continue to provide much of the power and renewables deal momentum in 2017”, the report states. “Mega deals are on the cards in Australia with the definite 50.4 per cent 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$8.7 billion purchase of Brazil’s CPFL Energia as a channel for further stakes in South American distribution and transmission infrastructure. D

Frank Dillon

Posted by Frank Dillon

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