London, United Kingdom / Houston, TX, U.S.A. — (METERING.COM) — May 24, 2007 –The power industry is seeing a spate of major deals, and this consolidation is expected to gather momentum as the large players begin to vie for markets previously dominated by entrenched incumbents.
This is according to a new survey of forty senior power and utility executives by consulting company KPMG, which notes that merger and acquisition (M&A) transactions in the utilities sector reached a record $420 billion in 2006, up from $257 billion in 2005.
Of the respondents – 47 percent of whom were with companies that had acquired another power business in the past three years and 60 percent of whom were actively seeking acquisition targets – most expected that there would be further consolidation both in their national market as well as internationally (87 percent and 82 percent respectively) in the next three years.
Moreover cross-border consolidation is expected to continue apace, in particular in Europe and the U.S. Within Europe, merger activity to date has focused on the most liberalized markets, such as the U.K. and the Netherlands, and on high-growth markets such as Spain. However, deregulation in Central and Eastern European countries will present many future acquisition opportunities, while utilities in other EU countries are also expected to become acquisition targets under the pressures of market deregulation and concerns about security of supply.
In the U.S., deregulation is a much less significant driver of consolidation than it is in Europe, and rather it is the fragmentation of the U.S. power industry that creates the potential for achieving economies through M&As. While over the past 15 years the number of investor-owned utilities in the U.S. has shrunk from 100 to 70, mainly as a result of M&As, the industry is still believed to be under-concentrated relative to other network industries.
According to the respondents globally China, India, Australia and Russia are perceived as offering the best prospects for future growth. Rapid economic growth in China and India is creating large organic growth opportunities, while in more mature economies in Asia-Pacific utilities are ‘reinventing’ themselves in response to changes in the business environment. For example in the case of Australia, liberalization and privatization have allowed a number of companies to increase scale, diversify geographically and integrate competitive parts of the industry.
What is driving M&As? With the main driving forces for structural change in the utilities sector perceived to be increased competition and the drive for cost efficiencies, more than half of the respondents cited increasing market share, while other objectives included acquiring new products and services, increasing economies of scale, and penetrating new geographic markets.
Recent deals in Europe have included Spanish utility Iberdrola’s takeover of Scottish Power, German utility E.ON’s bid for Spain’s Endesa and the subsequent agreement with Enel and Spanish construction group Acciona, the planned merger of Gaz de France with Suez, and last year’s acquisition of Thames Water, Britain’s biggest water company, by a consortium led by Australian bank Macquarie.
In the U.S. major M&A deals have included the acquisition of Cinergy by Duke Energy, the acquisition of PacifiCorp by MidAmerican Energy Holdings, while pending is the acquisition of KeySpan by the U.K.’s National Grid. In Asia, MMC Corp, a Malaysian infrastructure group, agreed to buy Malaysian power company Malakoff Bhd, and Australia Utilities AGL (Australian Gas Light) and Alinta merged.