Is the Fragmented Utilities Market Ripe for M&A?
Utilities firms are increasingly turning to mergers in order to improve their bottom lines in the face of a drop in demand for electricity and the prospect of greater costs ahead. This approach, however, has not always been entirely successful — so is M&A the right move for this highly fragmented industry?
As the world becomes more efficient — with greater use of smart manufacturing, renewable energy and low power processors - the demand for electricity is slowing. In light of this change, major utilities, such as Consolidated Edison, have been forced to reassess their growth forecasts. The firm has recently made the decision to downgrade its outlook for the city of New York’s energy demand growth from 1.7 per cent to just one per cent for the coming decade. Deloitte’s Vice Chairman of Energy and Resources, Gregory E. Aliff, stated, “Practically every utility today is thinking about flattening growth in demand for energy.”
Growth will also be reduced by the trend for self-generation. A recent study by Deloitte Centre for Energy Solutions found that a third of all the companies polled said they wanted to generate their own electricity in one way or another in the future.
This slowing demand for grid-supplied electricity, together with the greater costs that accompany complying with government environmental requirements, has created one of the most challenging times the utilities sector has ever experienced. The rising cost of complying with legislation on greenhouse gas emissions will have an immense impact on utilities — with some more affected than others. American Electric Power, for example, expects complying with new government rules on emissions to cost it between $6 and $8 billion over a number of years due to its reliance on coal power.
So where do mergers and acquisitions come in as a solution to these growing challenges? Some organizations are shedding assets that could increase their exposure to the new government environmental rules. Exelon, for example, is selling a collection of coal-fired power plants as part of its deal to buy Constellation Energy for $7.9 billion. It hopes to halve the share of power it generates from coal as a result of the merger.
According to Andre Begosso, the Senior Manager of Resources and Strategy at Accenture and partner Robert Laurens, other mergers are being undertaken simply in an attempt to generate in-organic growth in a market that is suffering from a severe lack of opportunity for organic growth. They added that major utilities firms are looking into M&A as a means of creating growth in several other economies aside from the US and that the issues facing the industry are global.
Merging has also rarely been easier in the sector, with competition authorities much more likely to approve deals at the moment, particularly if companies can persuade them that jobs will be preserved as a result. Duke Energy’s proposed $26 billion takeover of Progress Energy could create the USA’s largest utility if approved. It could provide energy for 7.1 million customers and would generate an annual turnover of $22.7 billion.
Writing for Energy Pulse, Begosso and Laurens claimed that turning to mergers has not always worked as intended in the utilities sector in the past. They cite the wave of deals between 1997 and 2004 as an example of a period where firms overestimated synergies and faced problems arising from the heavily unionized nature of the workforce. The Accenture analysts’ advice to merging companies is to focus on developing an operations-driven culture when working on acquisition integration, which will “help to drive efficiency and scale to the bottom-line.”
