ESG Aspects Loom Large in Power and Utilities M&A Activity

Environmental, social, and governance (ESG) efforts are factoring into merger and acquisition (M&A) deal activity within the power and utilities sector across North America, according to a report issued by PwC, a professional services firm serving the “Trust Solutions and Consulting Solutions” segments. “As policies are clarified and ESG strategies are strengthened, broad investor interest should continue to grow” in 2022, the report says.

The power and utilities industry saw increases in both deal volume and value during the 12 months ending on Nov. 15, 2021, the report says, “with significant contributions from both financial and inbound investors, as well as those focused on renewables.” While deal activity slowed after midyear, the rebound to pre-pandemic levels stayed steady in 2021, with the sector seeing 55 deals, up from 42 in 2020 and 52 in 2019. On a value basis, total deal value increased to $49.9 billion, up from $48.4 billion in 2020 and $42.9 billion in 2019, PwC reported.

“We saw volumes, as we defined deals in the space, hold pretty consistent over the last several years, including last year,” Jeremy Fago, PwC U.S.’s Power & Utilities Deals leader, said as a guest on The POWER Podcast. However, Fago noted that the size of deals has changed, with fewer mega-deals being done. “That was an expectation that we put out there several years ago when we looked at the types of deals that were being done at that time, and as a result, we expected a bit of a dearth in mega-deals as we moved into this period of time, including 2021 and 2022,” he said.

PwC’s report says, “ESG became a noted driver of deal activity as major power and utilities players focus on ESG investment and goals.” Fago agreed that ESG initiatives are part of the narrative underpinning some deals. “A lot of the companies in this space—in fact, most of them—have set some type of goal out there, particularly on the environmental side around carbon reduction, in some cases a net-zero target, you know, 10, 15, 20 years down the road,” he said. “I think it’s become table stakes at this point,” suggesting that having sound ESG policies in place is a minimum requirement in any M&A discussion.

Fago said he expects the focus on ESG to continue. However, he also said now that most companies have ESG initiatives in place, attention has turned to executing on strategies. In some cases, that means selling pieces of the business or buying new assets. “We expect some portfolio reshuffling as a result of this, where perhaps there are businesses within larger companies that don’t necessarily fit those ESG goals bespoke to that company and divesture of those platforms to recycle that capital into potential opportunities that do fit that profile,” he said.

“It’s going to be very dependent on not only the existing portfolio, but also what are the opportunities in your particular area and in your particular footprint to be able to do that,” said Fago. “We’ve seen it as certainly a reason for some of the deals that have been done, but again, it’s going to be very dependent on what the opportunity is for a particular company and how quickly that capital can be deployed.”

To hear the full interview, which includes additional discussion about the energy transition and its impact on deals; how possible government policy and regulation changes could affect M&A activity; other factors to keep an eye on in 2022, including interest rates, inflation, and potential tax code changes; and more, listen to The POWER Podcast. Click on the SoundCloud player below to listen in your browser now or use the following links to reach the show page on your favorite podcast platform:

For more power podcasts, visit The POWER Podcast archives.

Aaron Larson is POWER’s executive editor (@AaronL_Power, @POWERmagazine).

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