Mergers and acquisitions in the North American power and utilities space is continuing to recover from a steep dropoff, with third-quarter 2013 deal activity up from second-quarter and year-ago levels.
There were 12 power and utilities deals valued at more than $50 million in the third quarter, up from seven in the previous quarter and eight in the third quarter of 2012. Those 12 deals combined were worth $4.6 billion.
“Deal activity, in particular deal value, is not yet where it was a few years ago, and I don’t think it will get back to that level in the very near term,” Jeremy Fago, PricewaterhouseCoopers US power and utilities deals leader, told Breaking Energy. “But we’re starting to see some loosening,” he said.
Fago expects activity levels to continue rising in 2014. “It’s probably going to be about the same through the end of the year, but next year I think we’ll see more deals coming into the market.”
One big driver for the pickup in deal activity over the last few quarters has been a search for yield, Fago said. ”We’ve seen utility stocks trade up, and one reason for that is dividend payments that put them in the income class of investment,” Fago said. “With Treasury rates at historic lows, you’ve seen investor appetite for something that is steady, secure and provides a decent yield.”
But this puts them at risk in the event that the Federal Reserve Bank of New York raises interest rates. While recent media coverage – including remarks by likely incoming Fed chair Janet Yellen – suggest that a rate hike is a ways off, it does pose a legitimate concern for the power sector.
“It’s one of the issues that a lot of our clients are struggling with,” said Fago. ”If interest rates do, in fact, rise, does it mean that investors shift funds out of income-class investments and into growth or other investment classes? It’s likely going to have some impact.”
While higher interest rates could put pressure on certain power sector stocks as yield-generators, Fago indicated that the expectation of an eventual interest rate lift, coupled with demand side pressures – such as competition from distributed generation, or reduced consumption as a result of efficiency measures – may have helped to spur some recent deal activity.
“Increasing interest rates is going to happen, it’s a matter of when,” he said. “The question for utilities is how they position their businesses, find synergies, and manage top-line pressures like load growth to offset some of that pressure.” For some utilities, taking steps like selling non-core assets can help to cut costs or raise capital, while buying complementary businesses may help to improve efficiency.
“There are certain things that you can’t control, but there are ways to position yourself in the best way possible,” Fago said.