Clifford Chance

Europe key to power sector's M&A strategy

Nearly 40% of the respondents to Clifford Chance's European M&A: On the road to recovery? survey from the power sector identify M&A as the main focus of their growth strategy. Almost half (46%) of them say that Europe will form a major part (over 50%) of their acquisition strategy over the next two years while almost as many (44%) say that European socio-economic uncertainty has increased their appetite for opportunistic M&A deals in the region.

Cash-rich buyers are making the most of opportunities as utilities look to sell underperforming assets , move into markets providing better opportunities or free up cash/reduce debt. Transmission and distribution networks, often requiring significant capital investment, have represented obvious disposals for cash-constrained utilities. Network deals, sales of portfolios of operational renewable assets and stakes in capital-intensive offshore wind developments are likely to continue to form the basis for disposal programmes.

The UK and Germany – where political and regulatory change is impacting the power sector – were among the hot spots for M&A opportunities identified by sector respondents. Nuclear and other opportunities have been generated in the UK by the government's Electricity Market Reform which seeks to create an environment where carbon reduction targets can be met whilst security of supply and competitiveness are maintained.

While significant developments in the power sector in Asia are helping to maintain robust levels of M&A within the region, the survey responses and recent transactions demonstrate that these regional developments are not dampening investors' appetite for opportunities in Europe. Aside from Hitachi's acquisition of the UK's Horizon Nuclear Power, trading houses such as Mitsubishi Corporation have announced significant transactions.

Commenting on the results of the survey from the sector's perspective, Clifford Chance's M&A partner Brendan Moylan, said:

"We expect this trend to continue as the pressure on trading houses to secure returns abroad combined with the significant role Japanese banks are now playing in the European power sector, provide a basis for further outbound M&A. Japanese entities stand to benefit from the competitive advantage available from their strong institutional relationships with the mega-banks and the low cost of financing available from these dominant market players."

The survey, conducted by the Economist Intelligence Unit (EIU) on behalf of Clifford Chance, canvassed the views of senior executives at close to 400 large companies globally from a wide range of industries, including the power sector. Over half of companies represented in the survey have annual revenues in excess of US$1 billion.

In terms of deal structures, two-fifths (40%) of sector respondents cited traditional M&A as their preference. This contrasts with the firm's 2012 survey of global corporates where joint-ventures and partnerships were cited as the preferred deal structure for M&A globally, demonstrating that investors feel less need to use deal structures to mitigate political, financial and legal risk when undertaking M&A transactions in Europe. However, a large proportion of deals are sales of less than 100% stakes, which highlights the significance of utilities' divestment programmes and their ability to dictate deal structures.