NEW YORK, Jan. 18, 2007 (PRIME NEWSWIRE) -- Deal values shattered all records in the electricity and gas utilities sector over the past year, reports "Power Deals 2006," the annual analysis by PricewaterhouseCoopers of M&A in the sector. Total deal values shot high above the $196 billion record level set in 2005 to reach $298.8 billion in 2006. This is seven times the $43 billion level of transactions recorded in the sector just three years ago in 2003.
The rise is all the more remarkable as it comes in a year when deal activity from corporate U.S. utility players plummeted, although it was only in 2004 that North American bid activity outstripped Europe. In the last 12 months, a $136.1 billion chasm has opened up as European players moved for $190.6 billion worth of targets compared to $54.5 billion by their North American counterparts.
The sharp downturn in North America came as companies addressed aggressive regulatory approaches from some state regulators during a U.S. midterm election year that coincided with the ending of rate freezes and reaction to the repeal of the Public Utilities Holding Company Act. North American electricity deal values fell 64 percent to $20.7 billion, not far above the $16.7 billion level of 2003.
While U.S. deal activity tumbled, European and Asia Pacific deals soared. European power M&A activity continued to break all the records in 2006. The number of European bidders was up by 25 percent on the previous year, itself a record-breaking year, and the total value of European power targets increased by a massive 56 percent. In Asia Pacific, the number of deals in the electricity sector rose by 26 percent while total target value for Asia Pacific electricity assets soared by 141 percent to $34.2 billion.
"We are seeing record deal levels but, more than ever, it is regulators and politicians that are deal makers or breakers in the utilities sector," said Manfred Wiegand, Global Utilities Leader, PricewaterhouseCoopers. "The downturn in the U.S. comes as companies hold fire in the wake of moves by state-level regulatory commissions and the cancellation of two big deals. In Europe, the race by utility companies to achieve super-regional scale ahead of retail market liberalization has intensified. The European Union (EU) Commission's push to dilute assumed market concentration will not halt the race but, instead, move it in a new direction as the rules of the game change."
2006 saw the power M&A market move beyond mega-deal territory into an era of 'mega-mega deals.' Previously, only two bids had ever topped the $20 billion mark -- in separate years in 2004 and 2005. In 2006 there were no fewer than four deals above this level initiated in the one year. Two of them -- E.ON's bid for Endesa and Suez's attempted merger with Gaz de France -- moved bid levels into 'mega-mega deal' territory with total deal values of $66 billion and $43 billion respectively.
Looking ahead
"There is considerable room for consolidation in most major world markets, which are nowhere near the more advanced stage of consolidation being seen in Europe," said Wiegand. "Even as the race to 'super regional' status moves into its later stages in Europe, there is scope for some remaining big deals as the 'super regionals' jostle for position. The recent EU Commission recommendations on unbundling and concerns on liquidity might open up a new deal front. Companies will need to consider their strategic options to determine their preferred mix of asset sales, physical capacity auctions, virtual capacity auctions and asset/contract swaps."
Power Deals 2006 also includes a focus on the key regional markets:
North America -- North American target values rose 15 percent on 2005 levels, maintaining the headline momentum that began in 2004. But this headline growth was sustained only by two large bids involving players outside the immediate U.S. corporate utility sector -- the Kinder Morgan management buy-out, financed by a group of investment firms, and the move by U.K. utility company, National Grid, for KeySpan. In contrast, American power utilities declined to make any big deal bids. Were it not for the Kinder Morgan and KeySpan deals, total target values in North America would be down 40 percent from 2005 levels.
"Many people thought the repeal of the Public Utility Holding Company Act would provide a green light to increased deal activity but, in its absence, some state public service commissions (PSCs) are stepping in and placing new and greater restrictive conditions on proposals," said John McConomy, U.S. Power and Utilities Transaction Services Leader, PricewaterhouseCoopers. "The actions of Maryland PSC (MPSC) and the New Jersey Board of Public Utilities (NJBPU) were a huge factor in the decision to take the proposed mergers of Exelon and PSEG, and FPL and Constellation, off the table during 2006."
"Something will have to give," added McConomy. "Stock market earnings per share growth expectations are way above what companies can achieve in most territories from organic growth alone. The power sector remains very fragmented in the U.S. with huge scope for consolidation."
Europe -- Europe was the undoubted focus of power deal activity in 2006. Around two-thirds of total bid value (64 percent) came from European entities while European targets comprised 58 percent of total target value. There was a substantial shift in the center of gravity of bid activity across the Atlantic from the U.S. to Europe. Even taking out of the equation the successive bids for Endesa, by Gas Natural in 2005 and E.ON in 2006, total European target value was up by 31 percent from the previous year.
"The pressure to be in the leading position ahead of retail market liberalization is being matched by pressure to diversify and secure fuel supply in an era of scarce energy resources and environmental concerns," said Mark Hughes, European Leader, Utilities Corporate Finance and Advisory Services, PricewaterhouseCoopers. "Of course, the big battle ahead will be on the regulatory front as the interplay between the EU Commission's push for unbundling and national government's support for national champions plays out. No fewer than eight European country governments still retain some powers to approve, reject or amend electricity regulatory decisions. If the political obstacles can be ironed out, the Commission's recommendations offer energy and utility companies new ways to restructure and expand their EU-wide position."
Asia Pacific -- Total Asia Pacific deal value rose to $43.6 billion in 2006, up from $17.2 billion in 2005 and $6.2 billion in 2003. The number of deals in the electricity sector rose by 26 percent while total target value for Asia Pacific electricity assets soared by 140 percent to $34.2 billion. The number of gas deals hardly changed. Nonetheless, total gas asset target value leaped -- from 2005's $3 billion to $9.3 billion in 2006. The variable and limited climate for deal-making in the region is reflected in the fact that the greatest share of deal activity by far is in Australia. This single country accounted for 43 percent of all Asia Pacific power deal values in 2006. Nonetheless, the second biggest deal in the region in terms of deal value was the all-Malaysian $4.7 billion bid for Malakoff by MMC.
"Competition for assets is being reinforced by activity from financial institutions and funds," said Derek Kidley, Australasia Energy and Utilities Leader, PricewaterhouseCoopers. "The result has been intense competition and high prices. Australian-based infrastructure funds have continued to be global pacemakers with the acquisition of power assets across the globe by the likes of Macquarie and Babcock & Brown. The power deal market in Asia Pacific looks set to continue on a buoyant course. As more of the Asian markets open up, it is likely that there will be a steady stream of assets coming into play. Also, with deal values high and competition for assets intense, there is a continued likelihood that utilities from outside the region who have invested in the past may take the opportunity to sell."
Notes to Editor:
1. Cross-border deal activity is defined as acquisitions across territory, with domestic acquisitions referenced as within home markets. 2. Methodology: Power Deals is based on published transactions from the Dealogic 'M&A Global' database, December 2006. Analysis encompasses announced deals: including those pending legal and financial closure, and those that are completed. All values and deals mentioned include assumed debt. Further information and a full list of transactions is available by visiting www.pwc.com/energy. 3. The Global Energy and Utilities group (www.pwc.com/energy) is the professional services leader in the international energy and utilities community, advising clients through a global network of fully dedicated specialists. Our team of energy sector specialists can support clients in assessing the practical implications of EU Energy and Competition policy on your business and in identifying strategic, regulatory and implementation opportunities. 4. PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 140,000 people in 149 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. 5. "PricewaterhouseCoopers" refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.