Demand for renewables fuels Western European energy M&A

Driven by renewable energy deals, 2018 was a near-record year for the Western European energy market. Despite a slow start, 2019 looks likely to deliver a number of notable sales

Last year was a stellar one for M&A targeting energy companies in Western Europe, registering the second-highest annual M&A value of the past decade*, thanks in large part to an increased appetite for renewable energy resources.

While Q1 2019 saw a slowdown in M&A activity, registering only US$8.8 billion in deal value—the lowest quarterly value in three years—activity is likely to pick up for the remainder of the year. Already, several billion dollar-plus deals have been announced in Q2. Sector-wide shifts towards cleaner energy and large amounts of dry powder in the hands of infrastructure funds and other financial sponsors are the likely drivers for a rebound in dealflow.

Appetite for green energy stays strong

In Germany, the government’s Energiewende (energy transition) policy is prompting companies to restructure in order to focus on renewable energy. The complex US$46.6 billion deal (including net debt) involving E.ON taking over RWE’s subsidiary Innogy was 2018’s largest, and leaves RWE focused on producing renewable energy and E.ON as a provider of networks and customer services. The transaction will effectively overhaul Germany’s energy market.

The second-largest announced energy deal in the region last year was again motivated by renewables. Announced in May, China Three Gorges’ acquisition of the 76.73% of Energias de Portugal (EDP) it did not already own would have contributed US$27.4 billion (inclusive of net debt) to total year-end deal value, had the deal not fallen through in April this year. CTG was motivated to attempt the deal due to EDP’s attractive renewable assets.

Though activity has been relatively subdued so far this year, the transactions that have been announced are driven by the desire for renewables. In February, a consortium, which included KGAL Group and Commerzbank, acquired an 80% stake in Veja Mate, a German offshore windfarm in the North Sea, for US$2.6 billion. In the same month, Total Eren, a renewable power producer owned in part by oil major Total, acquired NovEnergia, a Luxembourg-domiciled renewables firm with assets in Southern Europe, for US$1.1 billion.

Energy firms are planning for a less oil-dependent future in other ways, too. Two of Europe’s largest oil and gas firms, Total and Shell, have made inroads into the consumer gas and electricity market.

Financial buyers sit on record cash pile

The strong activity in energy M&A has been driven in part by financial sponsor activity, which totaled US$28.8 billion last year, up on 2017’s total of US$25.7 billion.

Prominent deals include US-based PE firm Global Infrastructure Partners (GIP)’s US$5.9 billion acquisition of a 50% stake in UK-based offshore wind farm Hornsea 1, and TerraForm Power, a subsidiary of Canadian investment fund Brookfield, purchasing Spanish renewable energy firm Saeta Yield for US$3 billion.

Another major sponsor-led deal last year, CVC’s acquisition of a 20% stake in Spain’s Gas Natural Fenosa for US$4.7 billion, was part of the energy firm’s plans for a strategic overhaul after years of focusing on debt reduction. The firm, since rebranded as Naturgy, has announced it plans to triple its renewable energy output in the next three years.

Financial sponsors are set to remain active in the sector going forward. Last year was a record year for infrastructure funds’ capital raising: according to data provider Preqin, infra funds were allocated US$85 billion in fresh capital, the highest annual figure ever. Dry powder for unlisted infra funds now stands at US$175 billion, as of March 2019, another record, while PE dry powder sits at over US$2 trillion.

Macroeconomic wobbles ahead

The worsening trade dispute between the US and China could have broad effects on the global economy, and thereby on M&A markets. Already, the IMF has cut global growth predictions for the year. M&A in the energy market could be further weakened by a volatile oil price. After recovering to over US$70 a barrel in April, the price of Brent crude has dropped to around US$60 in the past two weeks.

In spite of these factors, there are some reasons to expect a rebound in deal activity in the rest of the year. Already Q2 has seen a number of significant deals, including Chevron and Conoco Philips’ disposals of some North Sea oil and assets for US$2.7 billion and US$2.6 billion. Total, meanwhile, is also looking to sell off some of its UK offshore assets in an ongoing sale process.

These disposal processes will add to the year-end total, while benign financing conditions and high levels of dry powder, along with a long-term trend towards renewables and other forms of cleaner energy, could push activity up further still.

* Figures correct as of 1 April show this as the highest total. The China Three Gorges’ acquisition of Energias de Portugal (EDP) has subsequently fallen through, meaning this is now the second highest year in a decade. Graph will be changed when figures are updated at the start of July.

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