Mergers appetite in power and utilities hits two-year high

Appetite for mergers and acquisitions in the power and utilities sector has reached a two-year high as investor confidence remains elevated, a survey by EY shows.

In the first nine months of the year, deal activity has surpassed the whole of last year’s level, having reached $125 billion.

For the next 12 months, 40% of companies in the power and utilities sector anticipate mergers and acquisitions, the highest level in two years.

EY surveyed more than 1,600 senior executives in more than 60 countries on various topics; of these, 91 were from companies in the power and utilities sector.

Over the past six months, there have been 233 deals in the sector, with total values of $97 billion. Of these, $38.6 billion were in the third quarter – the highest deal value for the quarter since the similar period in 2010.

The level of confidence shown by executives in the power and utilities sector remains high, although expectations of improvements for the global economy have fallen since April.

Executive Confidence Economy EY

Executive confidence in the economy still high. Source: EY

Respondents from emerging markets are particularly optimistic, notes EY, with 100% of executives from Brazil, China and India who took part in the survey saying they believe the global economy is improving.

Confidence in corporate earnings has remained at high levels, too.

Executive Confidence Corporate Earnings EY

Executive confidence in corporate earnings is stable. Source: EY

Confidence in market stability has decreased, however, and there has been a fall in optimism about the stock market outlook.

On the plus side, the percentage of executives in the power and utilities sector expecting to create jobs in the next 12 months has jumped to 50% from 30% half a year ago.

Newer skills, such as energy management, smart technologies and advanced renewable technologies will be needed.

With tensions between Russia and Ukraine rising, it is little surprise that executives in the sector see geopolitics as the biggest risk for their business.

This is followed by the risk of slower growth in emerging markets, fallout from the end of the Federal Reserve’s quantitative easing and the slow pace of reforms in the eurozone.

Interestingly, a relatively higher number of executives (6%) mentioned inflation as a risk compared with the number who cited deflation (1%) as a worry.

In terms of the size of the mergers and acquisitions in the power and utilities sector going forward, sentiment favours deals under $250 billion, therefore we could witness a shift towards small-cap and mid-sized deals.

Larger deals are expected to come from market reforms and privatisations in countries like Greece and Israel, continued divestment of assets in Europe and consolidation in the US.

While traditionally developed markets have been a hotbed for mergers in the power and utilities sector, emerging markets will host more transactions in the future, the EY report shows.

India is selling stakes in a number of state companies to cap its fiscal deficit, while South Africa, Kenya and Ethiopia are expected to become big renewables markets between this year and 2016.

More deal activity is also expected in Nigeria, Morocco, Algeria, Israel, Saudi Arabia and Qatar, while Latin America is also expected to see major deals as Mexico pushes ahead with reforms.

@AntoniaOprita

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