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PwC: Power deals continue to set new records despite credit crunch

Power sector M&A soared to new record levels in 2007, despite the effect of the credit crunch. The latest edition of Power Deals, the annual review by PricewaterhouseCoopers of power sector M&A, shows a 25% year on year increase, with the worldwide 2007 power deal value of $372.5 billion nearly nine times above the $43 billion recorded just four years earlier in 2003.

Records continue to be set in the sector for the total number and value of deals and for the size of individual deals. According to PricewaterhouseCoopers, there was no evidence of a fall-off in deal activity as the credit crisis broke. Some 57% of all power sector deals, 441 of the total 768 deals in 2007, came in the H2 of the year. Indeed, the number of final quarter deals in 2007 was 73% up on the final quarter of 2006 and final quarter total value was 21% up. Manfred Wiegand, global utilities leader, PricewaterhouseCoopers commented: “Momentum in the sector was not noticeably hit by the credit crunch. We will eventually see some impact but many corporate players have cash to invest. Investor appetite for the sector is likely to remain relatively favorable and the basic imperatives of non-organic growth and the need to secure and diversify fuel sources in an era of scarce energy cannot be ignored.”

Despite the headlines created by cross-border deals such as Enel’s move for Endesa, it was domestic electricity sector M&A that set the totals on fire. The total value of domestic electricity deals nearly trebled, from $73.4 billion in 2006 to $208.8 billion in 2007. The surge in electricity deals was so huge that it catapulted the power utilities sector as a whole to record highs despite a $82.5 billion fall in gas deals. Total gas deal values fell 77% to $24.2 billion in 2007, due to the absence of the gas mega-deals that were a feature of 2006. There were fewer mega-deals, reflecting the complexity of getting very large deals over the political and regulatory hurdles in both the US and Europe. There were two $20 billion plus deals in 2007 compared to four such deals in 2006. This change in mega deals represented a $43.7 billion reduction in year-on-year deal value but was more than offset by increases in the numbers and total value of smaller deals.

Momentum was strong across all territories. Unprecedented deal activity saw deals reach new highs in North America, Asia Pacific, the Russian Federation and in terms of targets South America. Europe recorded a significant year-on-year fall in gas deal values although, even here, electricity sector deal activity was intense and, again, set new records. Worldwide, the appetite of infrastructure funds for power assets continued undiminished during 2007. Bids by infrastructure funds rose 60% from $52 billion in 2006 to $83.4 billion in 2007 and accounted for over a fifth of all power deal bids. Europe remains the location for the greatest amount of deal activity but we are seeing strong momentum in all the other main markets. The gap between Europe and North American players in terms of the value of transactions is narrowing. In 2006, European players moved for $190.6 billion worth of targets as against $54.5 billion by their North American counterparts. In 2007, this $136.1 billion chasm had halved to a $71.6 billion gap. Nonetheless, the respective levels of activity remain a long way from the situation in 2004 when North American bids and targets outstripped those in Europe.

Spurred by restructuring of its power sector, the volume and total value of deals involving companies in the Russian Federation reached significant levels in world-wide terms for the first time. From just 2.5% of world-wide bidder value in 2006, bids by Russian Federation entities rose from $7.5 billion to $64 billion or 17.2% of all 2007 deal values. Virtually all of the Russian deal activity was inside Russia although 2007 saw Gazprom’s second purchase of a UK gas distribution company, reflecting the company’s aim of reaching further a field downstream. Moving in the other direction, E.ON made its first large investment in the Russian electricity sector with the $8.4 billion purchase of the OGK-4 power generator and Enel also made significant investments. The extent of this Russian-European interplay will be a key focus of attention in the year ahead. Manfred Wiegand, global utilities leader, PricewaterhouseCoopers commented: “The coming year will bring some uncertainty, not least with an election year in the US and Russia and the turmoil in the credit markets, but power sector M&A deal-makers will be mindful of continuing strong fundamentals. The credit squeeze will have an impact on the value and volume of deals. Raising debt finance to fund acquisitions is now more complex in every market because of worries about the carrying value of assets and businesses that are being purchased. There may be an influence on bigger, highly leveraged moves by private equity players but the fundamentals of the sector remain in place.”

A fall in gas deals dragged total power deal value in Europe lower in 2007 compared to 2006 but European electricity M&A activity continued to break all the records. The number of European electricity targets in play was up by 21%, from 161 in 2006 to 195 in 2007. Target electricity values rose 12% to $131.3 billion. European bidder activity in electricity rose even more, by 21% from $128.4 billion in 2006 to $155.5 billion in 2007, with bidder numbers up from 175 to 215. The vast majority of activity was by European corporate utility bidders as utility company consolidation continued. Mark Hughes, European utilities leader, PricewaterhouseCoopers, said: “Alongside the considerable consolidation moves inside Europe, we saw a number of expansionist moves by European utilities and Asia Pacific did not escape European attention either with a number of deals from financial players. Looking ahead, the strong euro is going to reinforce this momentum and there are enough companies with strong balance sheets and international ambition for us to expect these moves to continue. However the likely continuation of the staggering levels of deal activity, given the credit crunch and the extent of consolidation already realized in the European market, is unlikely to continue.” (FinChannel)