If you thought there was significant merger and acquisition activity in the power and utilities industry this year, look out for 2001, according to the M&A forecast for the industry by the Transaction Services group of PricewaterhouseCoopers.
The group points to the following factors as driving M&A activity in the power and utilities industry in 2001:
• Utilities remain undervalued relative to the S&P 500 based on historical discounts, despite the industry’s strong relative stock performance year to date. Value-unlocking opportunities remain for acquirers.
• Unregulated independent power producers (IPP) have outperformed regulated utilities as the markets have placed a higher relative value on generating and trading assets. Look for IPPs to arbitrage their high P/E multiples, as well as decent credit ratings, to acquire generating assets from traditional utilities that currently trade at relatively lower P/E multiples.
• Deregulation loosened up more than pricing. Deregulation has taken firm hold both in Europe and in certain states in the US. UK utility operators, in particular, are expected to continue to be strong acquirers. The deregulation process in the US, meanwhile, will drive the industry consolidation in 2001, as domestic companies look to become “super-regionals” with the scale to survive as independents.
• Besides the large “super-regionals”that will focus on being low-cost producers, look for the advent of new energy service companies. Much like the “one stop shopping” strategies implemented by companies in the recently deregulated financial services and telecommunications industries, these energy services companies will aim to be multi-service and technology providers. Mergers, acquisitions, joint ventures and strategic alliances will be integral components of building the new energy services companies.
• The business customer is critical. With up to 50% of revenues for the typical US utility coming from the commercial / industrial market, utilities that can’t meet the demands of business customers will soon find themselves vulnerable to takeovers by those who can.
“The forces that drove M&A strategies in 2000 will accelerate in 2001,” said Doug Meier, lead Transaction Services partner for the power and utilities industry at PricewaterhouseCoopers. “IPPs will continue to grow their generation portfolios and M&A will be a critical means to this growth. Utilities, in their quest to increase shareholder value, will accelerate their efforts to unlock the value of their generation and trading portfolios - either through disposals or spin-offs/split-offs.
“Economies of scale will continue to be an important rationale for utilities looking to implement their strategies of growth through geographic diversification,” Meier continued. “Finally, let’s not forget the importance of globalization. Look for UK and European utilities to continue their expansion into the US Similarly, I expect the US IPPs and utilities to continue to selectively expand their presence outside of the US.”
The Transaction Services group of PricewaterhouseCoopers provides M&A and capital markets advisory services to some of the largest strategic and financial buyers in the US The group operates from 14 US cities and over 90 locations in North America, Latin America, Europe and Asia.