Steve J. Tie Shue, Senior Director of Product Marketing | Merrill Corporation | November 26, 2019
Early preparation in any situation usually comes with minimal risk and significant upside. As global transactions in energy and power trend towards a double-digit decline versus the prior year, prudent planning is paramount for businesses needing to navigate choppy financial waters. This was the key learning from our recent Energy & Power M&A Spotlight panel. The lively discussion shed light on the many challenges facing the industry and ways for players to better position themselves in the year ahead.
Here are some other key takeaways from the panel and our live global audience of 510+ dealmakers.
1. No Shortage of Threats. More than any other sector, energy and power is caught in the center of significant global headwinds. That contributed to our global dealmaker audience being almost evenly split among 4 major issues most likely to impact deals in 2020. Performance of commodity markets slightly edged out demand weakness, recession concerns, and political uncertainty. However, a meaningful number of participants still consider tariff wars and protectionism as the leading treat to energy and power deals next year. This broad spread of risk creates an uncertain environment negatively impacting both innovation and appetite for investment.
2. Zero Premium Transactions. The proliferation of public and private players in energy and power in recent years has far outpaced demand. For example, there are currently over 850+ sponsor-backed energy or utility assets that have been held for 36 months or more. Companies are looking for economies of scale but investors are not willing to pay a premium price for struggling assets. The result is a continuing rise in the number of “SmashCos” or transactions involving zero or no premium.
3. More Restructuring & Bankruptcies. Our panelists expect more restructuring and bankruptcies stemming from global headwinds and the capital-intensive, debt-heavy nature of the energy business. They strongly recommend starting to plan early given the uncertainties of 2020 and the surplus of players in energy and power. Proactively developing a strategy for restructuring can help avoid bankruptcies or liquidation. Instead, management teams can focus on prepackaging deals with investors and law firms or begin working towards mergers of choice and avoid being forced to combine on less favorable terms.
4. Alternative Continues to Shine. Alternative energy represents 42% of energy and power deals in 2019; an uptick of 6% over the prior year. Growth drivers include renewed interest in hydrogen, impressive advances in second generation sources, and growing private equity interest in solar. And, as alternative sources become more commonplace or mainstream, there is a corresponding need to expand and commercialize its storage. Webinar attendees seemingly agreed by selecting energy storage as the area most likely to receive the bulk of investment dollars in 2020.
5. Make it Easy for Buyers. In energy and power, it’s a buyer’s market. This places the onus on sellers to put their best foot forward. Sellers must ensure they are being realistic about price, position assets in a truthful but positive light, and make it easier for buyers to access relevant information. And, our panel and webinar attendees agree that a critical component of sellers engaging buyers effectively is by keeping an organized data room with meaningful information. This includes making highly relevant documents like audited financials, phase one reports, and clean property records easily accessible and share ready.
Although uncertainties permeate 2020 forecasts for energy and power, it is clear early planning and robust due diligence can help dealmakers identify clearer pathways for success and risk mitigation.
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