1 European M&A: On the road to recovery? Insights on the Power sector
2 Global power sector M&A remains subdued following a spate of megamergers in 2010 and However, as nearly 40% of power sector respondents to our survey identify M&A as the main focus of their growth strategy, we focus on where opportunities are likely to arise in 2013 and beyond. The urgent need for power to facilitate development in emerging markets is contributing to significant deal flow in these regions. Brazil remains a popular investment destination for European and other overseas investors. There are also continued developments in MENA, the ongoing privatisation programme in Turkey in particular, and South East Asia. Mark Poulton M&A Partner, London Despite these global trends, a significant proportion of power deals in 2012 involved European targets. Capital constrained utilities embarking on divestment programmes to recycle funds to drive future growth are creating opportunities for M&A in Europe. The chance to access stable returns at reasonable valuations is appealing, particularly for overseas and financial investors. In the first half of 2013 the Economist Intelligence Unit carried out a global survey on crossborder M&A on behalf of Clifford Chance. The focus was on Europe the survey explored M&A opportunities and current perceptions of key risks, against the backdrop of the complex political and economic environment. 370 Board-level executives from companies with annual revenues in excess of US$ 500m were surveyed, from across Europe, Asia Pacific, the Americas and the Middle East, and from across a range of industry sectors, including the power sector. Top 5 risks for executing European M&A strategy in the power sector Rising costs Protectionism Reputational risk Geopolitical risk Currency fluctuation risk
3 European M&A: On the road to recovery? M&A opportunities arise in uncertain economic times n Europe s economic situation is heavily impacting power sector M&A. Economic growth rates, resulting in static or falling demand for power, and the euro zone s economic instability are identified as the top two factors making the European market unattractive. However, we expect this economic situation to continue to create opportunities for cash rich buyers in particular parts of the sector. n The current strategies of many utilities resonate with some of the principal reasons for sales of European assets - underperformance, a move into markets providing better opportunities and the need to free up cash/reduce debt. Transmission and distribution networks, often requiring significant capital investment, have represented obvious sales targets for cash-constrained utilities. Network deals, sales of portfolios of operational renewable assets and stakes in capitalintensive offshore wind developments are likely to continue to form the basis for disposal programmes. n Aside from the significant ongoing privatisation programme in Turkey, sector respondents expect opportunities for investors in Poland and other parts of Central & Eastern Europe, as governments are forced to sell assets to improve public finances or comply with undertakings provided as part of state rescue packages. n European political and regulatory considerations are also impacting the M&A landscape. The drive towards a more liberalised European electricity market has forced utilities across Europe to assess the impact of complying with unbundling legislation. The pressure to meet 2020 carbon reduction targets has also resulted in a significant growth of deals in the renewables sector. n Power respondents to our survey identify the UK and Germany two jurisdictions in which political and regulatory change is impacting the power sector as hot spots for M&A opportunities. Germany s nuclear phase-out has forced utilities such as RWE and E.ON to pursue significant disposal programmes. Nuclear and other opportunities have been generated in the UK by the Electricity Market Reform, which seeks to create an environment in which carbon reduction targets can be met whilst security of supply is maintained. n Non-European companies and financial buyers are responsible for much of the current activity. With nearly a quarter of respondents identifying sovereign wealth funds and private equity firms as likely competitors, it seems likely that this group of buyers will have an increasing impact on European M&A in the power sector. These bidders are attracted by current asset valuations and the stable returns available in parts of the sector. As only 20% of sector respondents consider European assets to currently be overvalued and only 14% expect prices to rise in the next two years, opportunistic acquisitions appear likely to continue. Peter Rosin Co-Head of Power Sector, Düsseldorf Increasing role of co-investors and equity swaps to finance M&A n Preferred method 2 years ago n Preferred method now % of respondents Bank loans Raise funds from equity markets Raise funds from debt markets Use cash reserves Deals with strategic or financial co-investors Equity swap Other/don t know
4 Divestment agendas drive deal structures n 40% of respondents from the power sector identify traditional M&A as their preferred deal structure. This figure contrasts with the finding in our 2012 survey of global corporates, where JVs and partnerships were cited as the preferred deal structure for M&A deals globally demonstrating that investors feel less need to use deal structures to mitigate political, financial and legal risk when undertaking M&A transactions in Europe. However, a large proportion of deals are sales of less than 100% stakes, demonstrating the significance of utilities divestment programmes and their ability to dictate deal structures. n Disposing of joint venture or minority stakes in non-core assets enables cash to be generated without affecting the returns generated from core businesses. At the same time, selling-down interests in assets requiring significant investment enables utilities to access capital for future projects, whilst maintaining the scope of their portfolio. The share of power sector respondents identifying strategic mergers (23%) and JVs and partnerships (29%) as their preferred deal structures in the next two years reflects respondents views as to those opportunities which are likely to arise. n Concerns regarding access to finance are limited. No power sector respondents identify difficulties in accessing finance as an unattractive feature of the European market, and the increasing role of financial investors, typically backed by debt finance, reinforces this message. Bank loans remain the preferred method of financing deals, although the increasing role for strategic or financial co-investors and asset swaps as a method of financing transactions is highlighted by the survey results (see graph). Nick Hughes M&A Partner, London Asian investors continue to seek European opportunities n Significant developments in the Asian power sector are helping to maintain robust levels of M&A within the region. The post Fukushima restructuring of TEPCO generated large transactions, and wholesale reforms to the power sector have recently been announced by the Japanese Government. The domestic power industry in China is also experiencing significant changes, whilst the power sector in South East Asia identified by our survey respondents as a likely M&A hotspot is striving to meet increasing domestic demand, with opportunities expected to flow from restructurings in Vietnam, the next round of IPPs in Thailand and the Indonesian Masterplan, MP3EI. Our survey responses and recent transactions demonstrate that these regional developments are not dampening investors appetite for opportunities in Europe. n Unsurprisingly, concerns are expressed by respondents to our survey over the Eurozone s economic instability and low economic growth rates. However, bidders regard current asset valuations as an opportunity to secure high-quality assets with growth potential at reasonable valuations. In a likely reflection of the confidence generated by recent successes, Asian respondents are no more concerned by protectionism and antitrust interventions as a risk to executing their European M&A strategies than their European counterparts. n Aside from Hitachi s high-profile acquisition of the UK s Horizon Nuclear Power, trading houses such as Mitsubishi Corporation have announced significant transactions. We expect this trend to continue as the pressure on trading houses to secure returns abroad, combined with the significant role Japanese banks are now playing in the European power sector, provides a basis for further outbound M&A. Japanese entities stand to benefit from the competitive advantage available from their strong institutional relationships with the mega-banks and the low cost of financing available from these dominant market players, whilst the deep support of JBIC, NEXI and JOGMEC continues to offer Japanese sponsors a significant edge. n 14% of power sector respondents identify Chinese bidders as the most likely competition for European power assets in the next two years. Recent activity has included China Three Gorge s acquisition of a stake in EDP Renovaveis and CKI s acquisition of Wales & West Utilities. The political pressure on state-owned organisations to execute transactions overseas at the same time as opportunities are arising in Europe makes future deal-flow likely. n The EDP transactions are also evidence of a growing trend of overseas bidders taking advantage of European asset valuations to acquire businesses with exposure to high-growth markets at reasonable prices. Andrew Whan M&A Partner, Tokyo
5 Europe forms major part of acquisition strategy Appetite for opportunistic deals Break-up of the euro zone would not make Europe less attractive 46% of respondents say that Europe will form a major part (over 50%) of their acquisition strategy in the next two years 44% of respondents say that European socio-economic uncertainty has increased their appetite for opportunistic M&A deals in Europe 23% of respondents say that a break-up of the euro zone would negatively impact their pursuit of M&A in Europe Hotspots for power sector M&A Northern Europe Western Europe Central & Eastern Europe Middle East & North Africa South East Asia Brazil Above map highlights the regions identified by power sector respondents as offering the most attractive M&A opportunities
6 Our strength in Europe Advised International Power (now GDF SUEZ Energy International) on the 6.4 billion minority buy-out by GDF SUEZ of the remaining 30% stake in International Power Advised EQT on its acquisition of a 51% stake in E.ON Energy from Waste, an energy-from-waste company with assets in Germany, Luxembourg and the Netherlands Advised ENERGA S.A. on its acquisitions, in consortium with PGE Polska Grupa Energetyczna, of wind power portfolios from Dong Energy and Iberdrola in Poland (transactions valued at approx 500 million) United Kingdom Germany Poland Key global contacts Mark Poulton, Global/UK T: E: Peter Rosin, Global/Germany T: E: Nick Hughes, UK T: E: Laurent Schoenstein, France T: E: Umberto Penco Salvi, Italy T: E: Agnieszka Janicka, CEE T: E: Andrew Whan, Asia T: E: David Evans, Americas T: E: Peter Avery, Middle East E: This publication does not necessarily deal with every important topic or cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice. Clifford Chance, 10 Upper Bank Street, London, E14 5JJ Clifford Chance 2013 Clifford Chance LLP is a limited liability partnership registered in England & Wales under number OC Registered office: 10 Upper Bank Street, London, E14 5JJ. We use the word partner to refer to a member of Clifford Chance LLP, or an employee or consultant with equivalent standing and qualifications. If you do not wish to receive further information from Clifford Chance about events or legal developments which we believe may be of interest to you, please either send an to cliffordchance.com or by post at Clifford Chance LLP, 10 Upper Bank Street, Canary Wharf, London E14 5JJ.