Challenges and Opportunities Driving M&A Activity in Power and Utilities

Power and Utilities

Power and Utilities

How M&A trends can fuel growth in the Power and Utility industry?

The power and utilities sector is witnessing an incredible change as companies are increasingly turning to digital technologies. The industry has evolved tremendously, from rising costs to changing load patterns and newly emerging technologies to regulatory change. The increasing demand of decarbonization is also enabling significant transformation in the industry, pushing it toward a new future. Since the power and utilities sector covers the transmission, distribution and retailing of natural gas and energy, clean energy deals continue to drive M&A transactions.

However, in the Energy, Utilities & Resources industry, deal volumes are expected to decline in 2020. According to the US Energy Information Administration, US natural gas production and demand is likely to drop in 2020 and 2021 against record highs in 2019. This is majorly owing to the government steps to slow the spread of COVID-19, cutting economic activity and energy prices. 

For the first half of 2020, deal values in the global Energy, Utilities & Resources industry stood at US$95 million, which is downtrend from US$288 million in 2018. In contrary to this, industry experts and analysts simultaneously expect renewables business to continue to grow during the same timeframe. 

The sharp slowdown in global industrial and commercial activities during the crisis is substantially lowering the demand of electricity dropped by nearly 15 percent to 20 percent across Europe, India and the US. Despite this, EY Global Capital Confidence Barometer results suggest that as an essential provider of electricity, gas and water, the power and utility sector has been less significantly impacted than other sectors, especially comparing with consumer-facing domains, such as tourism, hospitality and retail.

In the EY report, power and utilities executives have shown more confidence regarding returning to dealmaking post-crisis over their global peers, with 48 percent executives expected that the M&A market to improve in the following 12 months. Since the COVID-19 pandemic is continuously advancing, the numbers rose to 59 percent. And it seems that the power and utilities executives expect to turn sentiment to action as 58 percent of respondents surveyed reported that they will pursue M&A in the next 12 months.

While the effect of COVID-19 is likely to have a drastic impact on the utility sector for quite some time, industry analysts are not much optimistic about M&A deals within utilities in the current business environment. Even many announced M&A deals in the last few months were either amended or canceled while many have been postponed.

There are a few numbers of transactions pending currently, with three major ones combining a market value of nearly US$6 billion. El Paso Electric Co. reached an agreement in June 2019 to be acquired for US$4.3 billion. The Public Utility Commission of Texas permitted the deal on January 2020, subject to the terms of a settlement reached in December 2019. And the New Mexico Public Regulation Commission accepted a settlement on March 11, with similar provisions.