Merger Partners Skipping Down the Aisles in Utility Land
The utility industry vows to stay together til debt do us part, thank you.
Mergers and acquisitions are all the rage once again in the power sector, according to numerous reports. Accounting and consulting firm EY (formerly Ernst & Young) recently noted that so far this year U.S. deal values have skyrocketed 255 percent compared with the same time frame in 2015.
“Lower margins and lower demand for electricity, partly due to advancements in energy efficiency, have been driving consolidations. Since these dynamics are not changing, the M&A boom will continue into the second half of 2016, but likely not at the same pace as we’ve seen. We are running at four to five megadeals every six months, which is historically very high,” Joseph Fontana, EY Global Utilities Leader, Transaction Advisory Services, said in a statement accompanying his firm’s findings.
The latest combo accompli came last week when Southern Co. closed on its $8 billion acquisition of natural gas distributor AGL Resources. Earlier this year Exelon Corp. and Pepco Holdings finally closed on their nearly $7 billion combination first announced in 2014. The move had to overcome stiff resistance from local regulators and third parties in Washington D.C., but Exelon prevailed in creating the nation’s largest utility holding company reaching close to 10 million customers in the eastern U.S.
Nothing—not customer, competitor or regulatory resistance—seems to be slowing down the M&A rush. June may be the most popular wedding month, but one month earlier brought the biggest recent proposal with Great Plains Energy and Kansas-based Westar Energy ready to tie the knot in 2017 for $8.6 billion.
EY isn’t the only one taking measure of this merger mania. PricewaterhouseCoopers and Bloomberg are covering the utilities as they skip down the aisle.
PwC’s April report, “Q1 2016 North American Power Deals,” determined that power and utility industry deals topped $41 billion in total value, compared to only $11.5 billion the previous quarter. Seven megadeals exceeded $1 billion, compared with two mammoth mergers done in the fourth quarter of 2015.
Shortly after the Pepco merger closed, Exelon CEO Chris Crane told “Bloomberg Markets” that he believes consolidation in the utility sector is necessary.
“And it can provide a competitive advantage for not only the consumer but also the other stakeholders in the communities we serve,” Crane said.
Another late June article by Bloomberg called it “merger time in utility land.” The piece by reporters Liam Denning and Rani Molla looked at potential future targets, those with small enough market caps and reasonable growth potential, such as Portland General, Pinnacle West Capital (owner of Arizona Public Service) and others.