Author
Joseph Fontana is Ernst & Young LLP’s general utilities and power industry leader, transaction advisory services. Fontana has more than 20 years of corporate finance and transaction experience, with a focus on the utility and power generation industry. The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP. Contact Fontana at joseph.fontana@ey.com.
Deregulation of the global utilities capital can create new opportunities market forces creating opportunities for
industry has resulted in an environment to effectively maximize value for their premium prices? Is the near-term need
ripe for transactions, fueling merger and companies and stakeholders in the to raise capital through asset sales more
acquisition activity across the sector. With following ways: important than the long-term value that the
nearly 250 deals totaling $100 billion Liquidity Infrastructure and private same assets could create? Has the utility
announced in the first quarter of this year equity funds are bringing additional established relationships with regulators
alone, including more than 150 in the U.S. liquidity into the sector, resulting in through which it can convey the long-term
and Europe, transactions will continue to greater competition for assets and benefits of private capital investment?
play a significant role in reshaping the stronger balance sheets. Liquidity can Access to inexpensive lending has
electric and gas utilities space. positively impact large and small utilities helped fuel the sector’s M&A activity
Today, a diverse group of market alike, whether they are rationalizing their for the past several years but recent credit
participants, each with its own set of asset base through the sale of non-core issues and their impact on the broader
financial goals, drives the market. Key assets or seeking capital investment for debt markets have caused lenders to
players include regulated utilities, which their retained business. reduce the number of transactions.
are seeking growth in mature markets; Stability Infrastructure and PE Despite these challenges, it appears the
independent power producers, which funds are entering into transactions with availability of assets for private capital
are driven primarily by greater scale long-term investment goals in mind. investorsremainssolid. Theimpactfrom
and scope; and private capital investors, For infrastructure funds, the focus is the current credit environment will slow
who continue to show strong interest in on maintaining long-term steady cash the number of deals, but it is not likely to
utility investments. flows, while the goal of PE funds is to reverse the investment trend.
improve operations, thereby increasing
The power of private capital the underlying value of the business. In The common denominator
Not long ago, the prospect of private both cases, private capital investors are Strategies in the utility sector have capital generally foreshadowed a sale retaining assets longer, adhering to the changed over the past decade, but one three to seven years after the transaction. established business model, and working market driver has remained the same: Regulators historically misinterpreted with existing leadership teams. value. From aggressive expansion private capital’s limited holding periods Investment On a global basis, into new business lines and markets in and desire to seek above-market returns construction in the utility industry is the mid- to late 1990s, to a period of as a danger to the long-term needs of the estimated to exceed $11 trillion by restructuring in the early 2000s when utility’s infrastructure and its customer 2030, according to the International companies refocused their strategies, to base. As a result, regulators rejected Energy Agency World Energy Outlook today’s partnerships with new market several private capital deals, citing 2006. Utilities, power companies and players, utility companies continue to concerns over investment track records. transmission businesses acquired by look for ways to maximize their value.
Today’s private capital players, as private capital have access to certain capital Wall Street wants it. Investors expect it. in the past, are looking more toward the that they may have previously lacked, But regulators must approve it. future of the companies in which they are thereby permitting these businesses to The key for utility companies investing. In many cases though, they are advance construction plans. to effectively manage and leverage holding onto assets longer, maintaining As the markets become more market forces is positioning themselves the existing business model and engaging competitive, new private capital players for opportunities consistent with their key stakeholder groups, from the provide greater opportunities for growth, objectives and obligations with future management team and employee base but they also present challenges for earnings growth, greater scale and scope, to legislators, regulators and grassroots utility industry leaders. reliability of service or all of the above. environmental organizations, to ensure With every deal subject to scrutiny Whether that takes the form of asset the long-term success of the business. from regulators, customers, financial divestitures and deals or large-scale
The emergence of infrastructure analysts and other key stakeholders, consolidationsandcombinations,private and private equity funds as a significant utility executives and managers must capital investors will continue to play investorgroupisestablishinganevenmore carefully weigh both the benefits and an important role in utilities’ ability to dynamic utilities marketplace. Private the risks of their decisions. Are current capture value.
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