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Deal activity in the US power and utilities sector nearly doubled in the first six months of 2011 over the preceding year as companies spent $52 billion to acquire new capacity rather than build their own.Companies are “buying growth versus building new capabilities from within,” US power and utilities transaction services leader John McConomy for accounting firm PwC said in announcing the latest figures from the North American Power Deals report for the second quarter of 2011.
“We expect that ongoing pursuit for additional and diverse generation capacity will sustain a continued interest for deal activity in the sector for the remainder of 2011,” McConomy said.
Three transactions worth more than $1 billion each lifted the average deal value for the second quarter to $1.5 billion, a 36% increase from the same period a year ago. Companies are choosing to spend money and accept the lowered regulatory risk of mergers and acquisitions rather than face the shifting policy environment and multifaceted task of building new power plants.
“The various stakeholders involved in these deals are working together to reach timely regulatory approvals,” McConomy said.
Utilities are also responding to a mix of regulatory uncertainty and political pressure by buying rather than building renewable generation. Hesitant to begin construction of new projects using renewable fuel when federal policies are evolving and government funds are increasingly elusive, utilities have been buying renewable generation to meet their state mandates, driving deal volume higher as purchases close.
“There is ongoing attractiveness of adding renewable energy capacity,” US power and utilities transaction service partner Rob McCeney said. “We expect renewable energy deals to remain on the radar for both corporate and financial dealmakers as a result of a general uncertainty around ongoing legislative and regulatory changes from region to region.”
“The fragmented, regulated utilities industry is ripe for ongoing consolidation, but deals in the space have their challenges,” McConomy said. “Rising commodity costs, regulatory and compliance concerns, and growing investment requirements are just a fraction of the factors that can detail a power and utility transaction.”
Several of the largest energy providers in the US recently released their first half 2011 results to investors nervous about the state of mergers in the works. They included Duke Energy, which is merging with Progress Energy, and Exelon, which has an enormous transaction underway to merge with Constellation Energy.
“These transactions are under heightened scrutiny, and dealmakers should tread carefully to ensure they have uncovered every significant risk,” McConomy said.