Renewables M&A Activity: Dealing in Hard Realities

Renewables deals now form a significant part of the overall power sector’s merger and acquisition (M&A) activity – albeit in a far tougher market – according to new analysis by professional services group PricewaterhouseCoopers (PWC).

Despite growing its slice of the M&A cake, core non-hydro renewables deal activity was very subdued in 2009, PWC found in the second edition of its ‘Renewables Deals’ report.

In part this reflects continued difficult conditions in credit markets, according to the study’s authors. In addition, many key players have been focused on developing project portfolios that they have built up over a number of years. In this sense, investment is still happening but not through M&A activity.

With the notable exception of the US, where stimulus and tax credit measures gave an impetus to activity, 2009 saw a big decline in wind power deals. Their total value shrank 62% from US$16.5 billion in 2008 to $6.3 billion last year, with a third fewer deals completed.

Wind power deals that did get announced were for much smaller values, PWC found. The average wind deal value was down 44% year-on-year. In contrast, both total and average hydro deal value powered forward from $10 billion to $15 billion. The share of hydropower in the total renewables deals mix rose commensurately from 26% in 2008 to 45% in 2009. In contrast, wind power’s share fell from 42% to 19%.

Deal-making for solar targets was subdued in 2009 as uncertainty and constrained financing affected sentiment. Solar deal numbers fell 31% from 181 in 2008 to 124 last year, and the total value of solar deals was down 44% to $3.5 billion. However, PWC noted that the solar sector is attracting a series of acquisitions by larger more cash-rich industrial companies as larger players extend their reach in the renewables value chain. Notable moves included Bosch‘s acquisitions of majority stakes in German solar module maker Aleo Solar and thin-film solar module company Johanna Solar Technology, and Siemens’ $418 million acquisition of Solel Solar Systems.

The buoyancy in hydro deals meant that the overall decline in renewables deals in 2009, although marked in the wind and solar sectors, was not as steep as that experienced in the wider power sector over the year.

While the value of non-renewable power deals (electricity and gas excluding renewables) fell 50% year-on-year, the decline in renewables deal value was 14%. Meanwhile, the share of value attributable to renewables deals rose from 17% in 2008 to 25% in 2009 – accounting for $33.4 billion of the gas and electricity sector’s total 2009 $131.1 billion deal value, according to PWC.

This $33.4 billion stemmed from 549 renewables deals. The number of deals fell by over a third (36%) year-on-year from 2008 to 2009 but average deal size (for deals with disclosed values) rose by a third from an average of $45.5 million to $60.8 million. The net effect was a significant but relatively modest fall in total renewables deal value – down 14% from $38.9 billion in 2008 and much less than the 50% for non-renewable power assets.

Hydro Powers On

A surge in large hydro deals buoyed overall renewables deal totals, with five of the 10 largest in 2009 involving hydro assets and a spread of deals in China, Europe, North and South America reflecting a variety of deal motivations and circumstances. The biggest deal was the $6 billion transfer of power generating units in the Three Gorges Hydroelectric facility in China from parent company China Three Gorges Project Corp to its majority-held Shanghai-listed power group, China Yangtze Power.

The second largest renewable energy deal in 2009 – Acciona‘s $3.7 billion purchase of Endesa‘s renewable wind and hydro power assets – was very much a product of earlier mega-deal consolidation in the European power sector. And, a second large European renewables deal – E.ON‘s $2 billion sale of 13 hydroelectric plants with a combined capacity of 312 MW to Austria’s Verbund – also had its roots in wider European power sector realignment, although this time prompted directly by a regulatory impetus.

Away from Europe and China, the largest renewable energy deal was in North America with TransAlta‘s $1.5 billion purchase of Canadian Hydro Developers.

The remaining $1 billion plus deal in the 2009 top 10 table is the $1.1 billion sale by Gas Natural of its 64% stake in Columbian utility, Empresa de Energia del Pacifico (EPSA), to a group led by Colombiana de Inversiones. Like the Endesa deal, the sale has its roots in an earlier European mega-consolidation move.

However, if hydro deals are excluded, it leaves a very different picture for the rest of the sector. The total value of non-hydro deals fell 36% from $28.9 billion in 2008 to $18.4 billion in 2009 and deal numbers were down 38% from 740 to 460.

Makers and Movers

Deal-making is being done by many types of buyers, PWC found. In terms of acquirers, activity is increasingly being driven by those outside of the ‘pure-play’ renewables sector. Infrastructure funds and other financial investors, for example, were on the buy-side in a quarter of renewables deals in 2009, up slightly from the previous year, although the value of their purchases was down on 2008 levels. However, the largest category of buyers noted by PWC is power utility companies, which were on the buy-side in a growing share of the 2009 deals – 42% of all deals, accounting for 55% of total renewables deal value. The need to bulk up in renewables is a key driver for utility companies, alongside more specific individual motivations for deals, such as those affecting the big hydro deals of 2009.

Private equity is also showing a high level of interest in renewables technology purchases, as illustrated by the HgCapital/AIG Financial Products Corporation deal in solar, and activity in the wind sector by players such as Nordic Capital and Riverstone Holdings. Another trend in the technology deal space is the increasing role of major industrial players such as Siemens and Rolls-Royce in providing early stage funding through stakes in technology providers in the nascent wave and tidal sector. For example, Siemens bought a stake in Marine Current Turbines in early 2010 and Rolls-Royce has an interest in Ocean Power Technology.

Regional Deal Trends

Deal numbers in all the major regions fell year-on-year, with typical declines of more than 40% in North America, South America and Asia. European deal activity was the most resilient but, even here, the number of deals fell by 27%. The biggest drop in deal activity was in Australasia where the number fell 59% year-on-year and total deal value was down 69%. Uncertainty around carbon trading and a fall in the value of renewable energy certificates in Australia formed the background for these falls.

Europe continues to act as the main focus for the largest concentration of renewables deals, accounting for 44% of all deals in 2009, up from 38% in the previous year.

While only accounting for 13% of deals, hydro and diversified deals delivered 59% of total European renewables deal value in 2009, the PWC analysis suggests. The dominant share of hydro and diversified assets was even greater as a result of a sharp deal falls in the European wind and solar sectors. Solar deal value more than halved year-on-year, from $4.5 billion to $2.1 billion, although solar deal numbers held up with 78 deals in 2009, a small dip on the 82 solar deals the year before.

North America’s share of deal volume held broadly level at just under a quarter (23%) of world-wide renewables deal value, down slightly from exactly a quarter (25%) in 2008, PWC says.

Pure Wind Plays

Deals for pure wind targets leapt to the fore in 2009. Wind power contributed the largest share of North American 2009 renewables deal activity, accounting for exactly a third of deal value and virtually the same share (34%) of the deal count, up from a 17% value share and a 27% number share in 2008.

The increased wind share came against a backdrop of accelerated growth in the US renewable energy sector as the industry benefited from government stimulus measures and tax incentives for investment.

However, there was an overall fall in deal activity for non-wind assets with total value down 19% and deal numbers down 41%. Indeed, the number of wind deals also fell – by a quarter year-on-year – but total wind deal value rose 58% from $1.6 billion in 2008 to $2.6 billion in 2009.

Behind Europe, it is North America and Asia that account for the largest share of total renewables deal value – both at 23%. And, on the surface, Asia Pacific’s contribution to worldwide renewables deal value looks buoyant with a 26% year-on-year increase in value from the region as a whole. But as nearly $6 billion of the total $7.9 billion deal value came from two single Chinese hydro deals, the underlying reality is that, following a subdued year in 2008, Asia Pacific renewables M&A deal-making fell to even lower levels in 2009.

Another Tough Year

According to PWC, the coming year is set to be another tough one for renewables deals. Despite the underpinning of renewables by incentive mechanisms in Europe, the US and some other territories, the triggers for an upturn in M&A continue to be uncertain, the report found, and financing conditions remain constrained. Signals for a convincing recovery remain mixed – indeed, it suggests that there remains a significant risk that recovery could stall.

Utility companies, which have been the biggest buyers of renewables assets, face massive capital investment challenges to replace ageing infrastructure and to modernise through, for example, the introduction of smart grids. These companies will be assessing how best to manage these significant investment challenges while also attempting to maintain their corporate credit ratings.

This could inhibit deal flow, with renewables having to compete hard for capital with other types of energy assets as utility companies prioritise investment that they perceive will have the most short-to-medium-term strategic value.

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