Australia well positioned as global power M&A shifts from Europe to Asia Pacific
24 January 2012
A major shift in global power M&A is occurring, ending European dominance in power deals and confirming the Asia Pacific as a hub of global activity, according to PwC's annual Power Deals report released today.
With Europe in the doldrums and facing further uncertainty, emerging markets centred in the Asia Pacific and South America are stepping up, creating a two-speed world market in global power M&A.
For the first time since 1999's inaugural survey, Asia Pacific buyers and sellers were behind the largest number of deals in 2011. Chinese companies are advancing their ‘go abroad' strategies and any further softening of valuations in Europe will likely reinforce their interest in the European marketplace, helped by favourable exchange rates.
Australia can expect to continue to be part of this global change, according to PwC Energy Utilities and Mining Industry leader, Mike Happell.
"While the power M&A market in Australia was quiet in 2011, the policy structure is now in place - namely a price on carbon - which has created certainty, and could potentially lead to busier times as the economy seeks to reduce its reliance on carbon and owners of affected plants consider their competitive position in the market."
Meanwhile, Europe recorded its lowest share of worldwide power deal value since PwC started analysing deal-making in the sector in 1999, with the total deal value in Europe plummeting 43 per cent year-on-year to stand at US$39.8bn (from US$70.3bn the year before). However, this US$30.5bn fall in power deal target value in Europe was more than made up for by a US$58.5bn increase in North America.
The report found that the eurozone crisis was having a double-edged effect on deals. On the one hand it is constraining finance while on the other it's expected to trigger deal flow. It's prompting a flow of possible privatisations as governments consider selling their power assets as part of their austerity measures. It is also leading to further currency weakness, strengthening the hand of overseas buyers.
Mr Happell said the eurozone crisis was creating new opportunities for the Asia Pacific.
"The eurozone crisis appears to be shaping the global energy market in fundamental ways, not only in where the deals are occurring but how they are being funded.
"It is also important to remember that part of the reform process in Europe will involve large-scale privatisations of power assets. Providing Europe doesn't go off a cliff and trigger a global recession we expect the deal flow to be strong for the foreseeable future," Mr Happell said.
New Partnerships
Mr Happell said one effect from the eurozone crisis would be for utility companies to increasingly look to alternative sources for funding.
"One of the constraints on market activity in the second half was the difficulty in raising funds, especially from European debt markets. One consequence of this will be that utilities will increasingly seek strategic partnerships - whether they be with Chinese-state owned enterprises, hedge funds, superannuation funds or sovereign wealth funds - to raise capital. This could spell further structural change for the industry."
"It should also help underpin deal flow.
"Financial buyers are of particular interest. They are cashed up in a cash-stricken world. In Australia, superannuation funds and specialist investment funds have invested in infrastructure assets, particularly via State Government privatisations. There has been debate over whether superannuation funds, subject to the right risk and return ratio, could diversify their infrastructure portfolios to include power," Mr Happell said.
Emerging Trends - the generation mix
Mr Happell said the report revealed several emerging trends that are expected to alter the generation mix and impact the deals market in 2012.
"One of the most significant of these is the global move towards cleaner energy sources. The push to decarbonise is already a major trend in the US energy market and, of course, Australia's carbon price begins this July.
"But one thing that appears to be off the table is uranium, following the Fukushima disaster last March. The effects on the global energy market are still playing out and will be far reaching".
"The change in generation mix will likely prompt companies to consider disposals, partnerships or refinancing," Mr Happell said.
The "Trilemma"
The push to remove carbon from developed economies, combined with the global economic downturn has created a "trilemma".
"Energy must be affordable, sustainable and enjoy secure supply. These three things must be in balance but recently we have seen some disruption. For example, while the developed world enjoyed an era of affordable energy, prices are now climbing. The push for cleaner energy - often replacing dirtier but cheaper energy sources - in these economies has coincided with the economic downturn.
"The answer to these problems will be dealt with at the political level. This could spell fresh uncertainty for investors and for dealmakers.
"Ultimately it could dilute the drive to meet the 2020 low carbon and renewable energy targets. If that was to occur investors would need to go back to the drawing board and draw up fresh strategies."
About PwC
PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See pwc.com for more information.
"PwC" is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC network. Each firm in the network is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.
With Europe in the doldrums and facing further uncertainty, emerging markets centred in the Asia Pacific and South America are stepping up, creating a two-speed world market in global power M&A.
For the first time since 1999's inaugural survey, Asia Pacific buyers and sellers were behind the largest number of deals in 2011. Chinese companies are advancing their ‘go abroad' strategies and any further softening of valuations in Europe will likely reinforce their interest in the European marketplace, helped by favourable exchange rates.
Australia can expect to continue to be part of this global change, according to PwC Energy Utilities and Mining Industry leader, Mike Happell.
"While the power M&A market in Australia was quiet in 2011, the policy structure is now in place - namely a price on carbon - which has created certainty, and could potentially lead to busier times as the economy seeks to reduce its reliance on carbon and owners of affected plants consider their competitive position in the market."
Meanwhile, Europe recorded its lowest share of worldwide power deal value since PwC started analysing deal-making in the sector in 1999, with the total deal value in Europe plummeting 43 per cent year-on-year to stand at US$39.8bn (from US$70.3bn the year before). However, this US$30.5bn fall in power deal target value in Europe was more than made up for by a US$58.5bn increase in North America.
The report found that the eurozone crisis was having a double-edged effect on deals. On the one hand it is constraining finance while on the other it's expected to trigger deal flow. It's prompting a flow of possible privatisations as governments consider selling their power assets as part of their austerity measures. It is also leading to further currency weakness, strengthening the hand of overseas buyers.
Mr Happell said the eurozone crisis was creating new opportunities for the Asia Pacific.
"The eurozone crisis appears to be shaping the global energy market in fundamental ways, not only in where the deals are occurring but how they are being funded.
"It is also important to remember that part of the reform process in Europe will involve large-scale privatisations of power assets. Providing Europe doesn't go off a cliff and trigger a global recession we expect the deal flow to be strong for the foreseeable future," Mr Happell said.
New Partnerships
Mr Happell said one effect from the eurozone crisis would be for utility companies to increasingly look to alternative sources for funding."One of the constraints on market activity in the second half was the difficulty in raising funds, especially from European debt markets. One consequence of this will be that utilities will increasingly seek strategic partnerships - whether they be with Chinese-state owned enterprises, hedge funds, superannuation funds or sovereign wealth funds - to raise capital. This could spell further structural change for the industry."
"It should also help underpin deal flow.
"Financial buyers are of particular interest. They are cashed up in a cash-stricken world. In Australia, superannuation funds and specialist investment funds have invested in infrastructure assets, particularly via State Government privatisations. There has been debate over whether superannuation funds, subject to the right risk and return ratio, could diversify their infrastructure portfolios to include power," Mr Happell said.
Emerging Trends - the generation mix
Mr Happell said the report revealed several emerging trends that are expected to alter the generation mix and impact the deals market in 2012."One of the most significant of these is the global move towards cleaner energy sources. The push to decarbonise is already a major trend in the US energy market and, of course, Australia's carbon price begins this July.
"But one thing that appears to be off the table is uranium, following the Fukushima disaster last March. The effects on the global energy market are still playing out and will be far reaching".
"The change in generation mix will likely prompt companies to consider disposals, partnerships or refinancing," Mr Happell said.
The "Trilemma"
The push to remove carbon from developed economies, combined with the global economic downturn has created a "trilemma"."Energy must be affordable, sustainable and enjoy secure supply. These three things must be in balance but recently we have seen some disruption. For example, while the developed world enjoyed an era of affordable energy, prices are now climbing. The push for cleaner energy - often replacing dirtier but cheaper energy sources - in these economies has coincided with the economic downturn.
"The answer to these problems will be dealt with at the political level. This could spell fresh uncertainty for investors and for dealmakers.
"Ultimately it could dilute the drive to meet the 2020 low carbon and renewable energy targets. If that was to occur investors would need to go back to the drawing board and draw up fresh strategies."
About PwC
PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See pwc.com for more information."PwC" is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC network. Each firm in the network is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.
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