The power sector saw steady, modest growth of merger and acquisition activity during the last three months of 2010, recently released analysis from PricewaterhouseCoopers (PwC) shows. The largest 25 announced deals decreased 37% in value, to $19.3 billion, compared to $30.8 billion in the fourth quarter of 2009, but financial buyers maintained investments in power deals in 2010 while corporate buyers continue to lead deal activity due to large amounts of cash to invest, PwC said.
The increase in regulated utility transactions, continued activity from corporate buyers finding more value in acquiring instead of developing assets, and foreign investors’ interest in gaining a foothold in the power sector bodes well for the North American generation industry, PwC said in its analysis.
“Generation asset transactions continue to illustrate pent-up demand to secure investments in the U.S. from Asian investors, while U.S. investors are seeking to capitalize on forward gas prices and potentially undervalued assets due to regulatory uncertainty, particularly in the environmental area,” said John McConomy, PWC’s U.S. utilities and power transactions leader.
The surge in regulated utility transactions could continue in 2011 given the likelihood of an increase in generation activity, said McConomy. Another factor that could drive mergers and acquisitions is a continuance of legislative and regulatory uncertainties, “especially around the price of carbon, driving opportunistic buying and fueling diversification,” he said.
In the fourth quarter of 2010, deals greater than $50 million totaled $19.2 billion. NU Holding Energy 2 LLC’s $6.9 billion acquisition of NSTAR Inc. Corp. was the highest-valued deal. The top 10 deals ranked according to value also included the $3 billion takeover of Dynegy by Icahn Enterprises and the $2.5 billion acquisition of InterGen Corp. by China Huaneng Group.
The drop in total quarterly deal value in the fourth quarter of 2010 compared to year-on-year values was attributed to a $24.5 billion transaction that occurred in the fourth quarter of 2009.
“When excluding that deal, which was the largest deal in the sector in three years, quarter-over-quarter deal value jumped 212 percent, while average deal value increased 161 percent to $1.6 billion in the fourth quarter of 2010 from $615 million in the fourth quarter of 2009,” PwC said. “The total number of announced deals over $50 million remained relatively flat in the fourth quarter with 12 deals compared to 11 in the same period in 2009.”
The analysis showed that "corporates" continued to lead power deal activity through the final quarter of 2010, contributing 64% of total deal volume, while financial investors represented 36%, the same percentage as the fourth quarter of 2009. Corporate transactions accounted for the top five deals in the fourth quarter, worth a total of $17.3 billion and accounting for 91% of total deal value, while asset transactions made up the remaining five of the top 10 deals. The largest 25 deals by transaction value in the fourth quarter were dominated by the power sector, accounting for 96% of activity, compared to 4% of alternative energy sources deals.
“Corporates and financial sponsors are sitting on large amounts of cash, and we expect they will continue to deploy their capital in power and utility deals in 2011,” said McConomy. “Size and scale remains important for utilities, especially on the regulated side, where companies have significant capital expenditure requirements and generation needs, and buying versus building continues to be a more cost-effective way of expanding their operations and geographic footprint. Financial sponsors are continuing to signal their interest in asset opportunities and are seeing good multiples for their acquisition targets that can provide strong potential returns.”
According to PwC, deals with value greater than $50 million in 2010 increased by $18.6 billion to $58.2 billion—a 47% increase. “The year-over-year increase in volume and value reflects the ongoing trends from the full year 2010—leadership from corporates and increasing interest from financial sponsors and foreign investors,” the firm said.
During 2010, corporate deals constituted the majority of transactions, representing $39.2 billion or 67% of total deal value, versus asset-related deals. Financial sponsors contributed 33%, or $19 billion, in total deal value “as they found strong opportunities in fossil-based and renewable power to put excess cash to work,” PwC said.
Sources: PwC, POWERnews