LONDON — Deal values for renewable energy rose 40 percent year on year, from US$38.2 billion in 2010 to a record $53.5 billion in 2011, reports Pricewaterhouse Coopers (PwC) in its annual global analysis of merger and acquisition (M&A) transactions in the sector.
With renewable technologies entering the big time and driving the market to new record highs, billion dollar deals dominated as solar, wind and energy efficiency overtook hydropower as the driver for big values for the first time.
One in every three deals in 2011 was solar and overall deal value for the sector is up 56 percent from $10.2 billion to $15.8 billion. There was also continued strong momentum behind deal activity in the energy efficiency sector and, buoyed by the increase in big transactions, deal value in these two sectors nearly doubled year on year. Together, these two sectors accounted for the vast majority (79 percent) of the $15.3 billion increase in the total value of all renewables deals.
According to the PwC analysis, European deal volumes dipped 6 percent but overall value rose 80 percent from $16.7 billion to $30 billion, while North American deal volumes dipped a similar amount at 5 percent, but with deal value also down 5 percent from $13 billion to $412.4 billion. However, South American deal volumes rose 90 percent, with total value up from $3.2 billion to $6.8 billion, and the Asia Pacific region saw its deal volume down by 26 percent in 2011 over 2010, but value rose 15 percent from $4 billion to $4.6 billion.
Behind the Increase
PwC suggests that a reappraisal of the role of nuclear in many countries’ national energy strategies after the Fukushima emergency has provided an extra impulse for renewable generation in certain markets.
Furthermore, falling solar prices are making solar power more economical and closer to grid parity in some markets. The entrance of pension and insurance funds, most notably via the $1.3 billion investment by Danish pension insurance groups in offshore wind in Denmark, confirms the trend towards a maturing market and the creation of secondary markets. But the report also warns that the sector is facing considerable growing pains.
Solar and Wind
As well as expecting to see a smaller number of global players in the solar market, PwC also says that consolidation among larger players is likely to occur in the windpower sector, adding that two recent profit warnings from Vestas are the most high-profile example of the challenges facing some windpower companies.
Ronan O’Regan, director of renewables and cleantech at PwC, observed: “As offshore wind projects increase in size, the need for a strong balance sheet to support the technology becomes more important. This creates scope this year for a landmark wind power combination between players from one or more of Asia Pacific, Europe and North America.”
Commenting on the overall findings, Paul Nillesen, partner, PwC renewables, said: “Dealmaking in the renewables and energy efficiency sectors is intensifying as the sector evolves. Sustained high deal numbers and record total value reflect a maturing of the sector. The trend is all the more noteworthy given the uncertainty in the market and in government policies on renewables.”
On the solar sector Nillesen continues: “U.S. and European manufacturers are coming under cost pressures. Some Chinese manufacturers also face heavy debt and are under competitive strain. There is significant overcapacity in China. The result is likely to be a succession of tie-ups within and between the main manufacturing territories of the US, Germany and China leading to a smaller number of big global players.”
Continued rolling uncertainty on the eurozone crisis will make the deal environment much more difficult for 2012 and a deeper crisis would undoubtedly dampen deal flow further, but Nillesen is optimistic that market uncertainty might not block the big deals, saying: “Staying out of the markets in the hope things will improve cannot be assumed to be the right strategy. The potential for further destabilisation domestically, or at an inter-governmental level, cannot be ruled out, but if a deal is highly strategic and mission-critical, then parties will still feel it is worth doing on the right terms.”
A Wider Context
Putting renewables into a wider energy M&A context, PwC believes that a major shift in global power M&A activity is taking place, ending a six year era of European dominance in power deals. According to the company’s annual Power Deals report, the eurozone crisis is having a double-edged effect on deals. On the one hand it is constraining finance, while on the other it is expected to lead to deal flow. It is also prompting a flow of privatisations as governments sell power assets as part of their austerity measures, and leading to further currency weakness, strengthening overseas buyers.
Asia-Pacific buyers and sellers were behind the largest number of deals in 2011 and any softening of valuations in Europe will likely reinforce their deal interest in the European marketplace, as well as the strength of the yen and renminbi against the euro, PwC believes.
Indeed, in the last 12 months, Europe has 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 percent year on year to stand at $39.8 billion (from $70.3 billion the year before). But this $30.5 billion fall in power deal target value in Europe was more than made up for by a $58.5 billion increase in North America.
Divestment in Europe
A strong theme which is expected to intensify this year is European divestment programmes, with the major power utilities needing to strengthen their balance sheets to make the big investments required in their core markets while retaining the flexibility to seek out growth markets. E.ON and RWE are both planning major divestments in 2012.
The capital expenditure and growth challenges faced by European utilities are all the greater because of current constrained debt markets and more limited financing options. This reduction in capital-raising options will continue to spur divestments by the major European power utilities, PwC says.
Andrew McCrosson, partner, UK power and utilities, PwC, said: “European utilities face a tricky balance. We’re going to see some interesting new partnerships in the years ahead as companies intensify their relationships with alternative sources of funding. It will mean a step-up in partnerships with sovereign wealth funds, pension funds and infrastructure funds. The Chinese state-owned power companies could play a role as well as other active Asia Pacific investors.”
Manfred Wiegand, global power and utilities leader, PwC, says: “It’s a different M&A world that is less euro-centric. European companies are looking to South America and other growth markets. Asia Pacific buyers are busy in Europe. The US deal flow is compelling and has further to go if current deals get the regulatory green light. There are plenty of reasons to expect deal flow to continue unless the current crisis has a worldwide recessionary effect.”