The US utilities dealmaking scene appears to be springing back to life. Following two years of below average activity amid the pandemic, there are positive signs of a revival in deal activity. There were 24 deals in the sector in H1, already an increase of 20% year-on-year.
Meanwhile, aggregate deal value came to US$10 billion over the first six months of the year, an 8% increase compared to H1 2021. This deal total, however, was due mainly one large transaction, the US$7.6 billion acquisition of South Jersey Industries.
This robust activity goes against the global M&A trend, with dealmaking volumes and values dropping across the board amid interest rate rises and challenging financing conditions.
Investors eye natural gas utilities
The energy transition is a major force driving dealmaking within the US utilities sector. The highest valued deal of the year was the US$7.6 billion acquisition of SJI, owner of four of New Jersey’s four gas utilities, by the Infrastructure Investments Fund—part of JP Morgan Investment Management.
The deal marks the first time that a New Jersey utility firm has been taken private, highlighting the current attractiveness of utilities assets due to their steady and reliable revenues.
A key motivation behind the deal is to enable SJI to fulfil its commitment of achieving carbon-neutral operations by 2040. According to IIF, SJI’s track record of investing in clean energy initiatives has given the company a clear competitive advantage within the industry.
Also announced in February, Ulico infrastructure fund (UIF) acquired regulated gas distribution company Hope Gas from Dominion Energy for the sum of US$690 million. According to UIF, the addition of the large-scale, established utility to its portfolio offers opportunities for further geographic diversification.
Power firms reposition for growth
M&A also remains a crucial tool for utilities firms to strategically reposition themselves within the market—especially as they grapple with the move to decarbonization. In March last year, PPL acquired The Narragansett Electric Company from UK utilities firm National Grid for the sum of US$5.2 billion. The move, which reflects PPL’s ambition to become a purely US-focused energy company, was announced in the same month as its sale of UK-based utility business Western Power Distribution (WPD) to National Grid, valued at US$10.4 billion.
It is perhaps no surprise that achieving decarbonization goals was a major driver behind its acquisition of Narragansett Electric Company. At the time of the announcement, PPL referenced its experience automating electricity networks as key to achieving Rhode Island’s target of 100% renewable energy production by 2030.
Overseas investment ramps up
Overseas investors are increasingly eyeing US utilities firms to secure long-term growth. In December last year, United Arab Emirates sovereign wealth fund Abu Dhabi Investment Authority (ADIA) acquired a 10% stake in Sempra Infrastructure for the sum of US$1.7 billion. A key motivation for ADIA’s investment, which completed in June this year, was the energy infrastructure firm’s role in modernizing energy networks and facilitating the energy transition.
Sempra Infrastructure is an energy infrastructure company developing multiple projects in North America, including liquefied natural gas (LNG) export projects, renewable energy, and carbon capture initiatives. It was formed in 2021 through the combination of Sempra LNG and Mexican energy investor IEnova. Prior to ADIA’s investment, KKR had previously acquired a 20% stake in the energy platform for US$3.4 billion in April.
Interest in water utilities sparks deals
The fragmentated nature of the water utilities space, sustainability potential, and the regulated nature of investments are drawing in dealmaker interest. In July this year, it was announced that US renewable energy firm NextEra, through an indirect subsidiary NextEra Water, had completed its acquisition of a portfolio of 23 water and five wastewater utility systems located near Houston, Texas. The deal had been announced in October last year.
The acquisition is the renewable energy firm’s first move into water utilities as it looks to become a market leader in the space over the coming years.
The current pressure placed on US utilities firms to play a role in the energy transition will continue to encourage them to seek out long-term investment partners. Institutional investors and private equity firms, meanwhile, are increasingly being held accountable for the way in which they deploy capital. The US utilities space presents plenty of opportunities to invest.
The long-term investment horizons and stable returns that utility investments offer is a further incentive for deals, with recent valuations for high-quality assets proving to be strong. IIF’s acquisition of South Jersey Industries, for example, represented a premium of 46.3% to SJI’s average stock price according to analyst reports.
Ageing infrastructure within the US utilities space is another reason to expect greater investment in the sector over the coming years. The American Society of Civil Engineers recently rated the US’ infrastructure a C-minus—a result of decades of underinvestment. The need to upgrade tired infrastructure will act as another incentive for deals.
With these driving forces incentivizing M&A, there is every reason to expect that the momentum that has been building over the past six months will continue to grow.