Utilities sector M&A staged an assured comeback in early 2021, with transactions typically motivated by the long-view pivot away from fossil fuels and investors seeking safe havens that promise to deliver predictable returns.
The trend toward fewer, larger deals proceeds apace, as volume stayed more or less steady and value rose. The first quarter numbered 38 utilities deals globally, one more than in Q1 2020, while value increased by nearly sevenfold to US$34.1 billion from the US$5 billion in deals struck that quarter. It’s the highest quarterly value in the sector since the US$38.1 billion recorded for Q3 2017.
Topping the table is UK-based National Grid's purchase of Western Power Distribution (WPD) from US energy company PPL in a US$19.8 billion deal.
As part of the deal, National Grid exited The Narragansett Electric Company—the largest electricity transmission and distribution service provider to Rhode Island, and a natural gas distributor to America's smallest state—to PPL Energy Holdings, a subsidiary of PPL, for US$5.2 billion (including net debt).
For PPL, the motivation for the deal is a straightforward expansion of its home market. For National Grid, the deal is part of a longer-term plan to focus on electric power. Post-deal, the UK grid operator's assets in electricity have increased from approximately 60% to 70%. Coupled with an announcement that it intends to put its gas business under the hammer at the end of the year, National Grid has made clear its intention to become a pure-play electricity provider.
The largest deal of Q4 2020 was the US$7.5 billion bid for US-based energy holding company PNM Resources by AVANGRID—a subsidiary of Spanish electricity giant Iberdrola. The all-cash offer highlights AVANGRID’s expansion into clean energy distribution and transmission and, if approved, will create the third-largest renewables business in the US. The deal marked Iberdrola’s eighth corporate transaction since the beginning of the pandemic, after pledging to spend €10 billion a year on renewables and energy networks.
Elsewhere in the sector, companies looked to slim down amid a volatile economic climate. This trend was seen in Centrica’s US$3.6 billion sale of US business Direct Energy to US-based power company NRG Energy last summer. Centrica came under pressure in 2020 as the COVID-19 crisis prompted a steep decline in energy demand.
Rising EV sales shift demand
Electrification is likely to be an ongoing theme for utilities providers for some time to come. Long-term fossil fuel usage is expected to trend downwards while overall energy consumption increases, owing to the demands not only of a growing population but also of the tilt towards electric power. The electric vehicle (EV) market, for example, is booming and only expected to gather pace, as evidenced by the meteoric rise of Tesla's share price, which gained more than 700% in the space of a year.
Deloitte forecasts that EV sales could rise at a compound annual growth rate of 29% over the next decade, from 2.5 million vehicles in 2020 to 31.1 million by 2030, and account for nearly one-third of all car sales. And a US Department of Energy study found that increased electrification across all sectors of the economy could boost national consumption by as much as 38% by 2050, largely because of electric vehicles.
The growth of the EV market is evident when looking at the special purpose acquisition companies (SPAC) market. US-based Lucid, UK-based Arrival, and Netherlands-based EV-Box are just some of the EV firms that have listed on public markets through combinations with SPACs or have announced plans to do so.
Another major contributor to utilities M&A deal value in the opening months of 2021 came in the form of another European deal. CK Asset Holdings, the property arm of retired Hong Kong magnate Li Ka-shing, acquired minority interests in four utilities from Li Ka Shing Foundation for US$2.2 billion: Northumbrian Water, Wales & West, UK Power Networks and Dutch Enviro Energy. Over the past three years, CK Asset has expanded beyond property to become one of the largest diversified conglomerates in Asia, with property now representing less than half of its portfolio.
Water utilities are significantly less volatile than other industries. The predictability of earnings means they can be financially leveraged, enhancing returns, and serve to smooth the fluctuations in earnings and valuations of other assets.
This defensive characteristic was evident in the largest utilities deal of Q1 in China, which saw US$3.4 billion invested across five deals, a 325% quarter-on-quarter surge in deal value. Tus Environmental Science and Technology, a wastewater treatment company, was sold for US$2.9 billion to Henan City Development Environment. While Henan was already involved in waste incineration, power generation and sewage treatment businesses before picking up Tus, its primary focus had been on highway maintenance and toll station services.
The challenges posed by the COVID-19 pandemic made clear the importance of asset diversification and signaled a wake-up call for energy utilities groups to take strategic action to secure their futures. As the macroeconomic situation continues to stabilize and transition to post-pandemic life, the pursuit of stability could prompt further deal activity among utility companies worldwide.