Continued market uncertainty caused a slowdown in North American power and utilities mergers and acquisitions (M&A) in the final three months of 2011, driving the number of announced deals down to the lowest level in several quarters, according to North American Power Deals: Q4 2011 , the fourth quarter industry M&A snapshot by PwC US. Despite a lack of clarity for the near-term outlook for the industry, PwC expects power and utilities companies' quest for scale and mantra of 'buy vs. build' to drive interest for M&A in the year ahead.
In 2011, there were a total of 42 announced deals greater than $50 million, which amounted to $97.8 billion in deal value compared to 48 deals and $57.3 billion in all of 2010. According to PwC, deal activity continued to build off the momentum from calendar year 2010 into the first half of 2011, but slowed, primarily after volatility in the equity markets, causing dealmakers to pause to gain more comfort around valuations.
"We witnessed continued momentum for deals in the first half of 2011, but a combination of factors caused dealmakers to defer deals that were in process, ultimately stalling sector M&A activity in the final two quarters of the year. The power and utilities M&A outlook will likely remain cloudy until the industry gains more clarity on regulatory and legislative actions and we see more stability in the capital markets," said John McConomy, PwC's U.S. power and utilities transaction services leader. "Despite a slowdown in deals, we expect interest in M&A will continue to be driven by power and utilities companies' need to broaden and diversify, and the need for acquisitions of scale to optimize revenues covered by regulated returns."
According to PwC, the number of announced deals greater than $50 million fell from 13 deals in the fourth quarter of 2010 to six in the fourth quarter of 2011. However, when comparing value, there was a sharp increase due to one mega deal, which accounted for $36 billion, or 84 percent, of the fourth quarter's total value of $42.6 billion. Total deal value amounted to $19.5 billion in the fourth quarter of 2010.
Despite a drop off in the number of announced deals, average deal size increased to $7.1 billion in the fourth quarter of 2011, compared with $1.5 billion in the fourth quarter 2010. Fourth quarter 2011 deal value was marked by two large transactions (worth more than $1 billion), despite a 60 percent decrease in large deal activity from six deals in the fourth quarter of 2010.
"A number of unforeseen regulatory challenges in the fourth quarter caused key players to shift their focus and reassess timing for deals that were expected to close by year-end," said Rob McCeney, U.S. power and utilities transaction services partner with PwC. "With a few deals scheduled to close in 2012, there is the potential for others to follow as the backlog of deals shakes out."
Strategic buyers accounted for all six deals in the fourth quarter, with two asset deals worth $5.7 billion and four corporate deals worth $37 billion. Domestic deal activity led with five transactions and $42.3 billion, or 99 percent of total fourth quarter deal value.
The number of power and renewable deals were split 50-50 in the fourth quarter with three deals each. Power led in deal value with $41.8 billion and 98 percent of total deal value, compared with $821 million in renewable deals. However, according to PwC, there was a trend of announced deals with undisclosed value in the renewable energy space.
"We are seeing deal activity pick up for renewable projects as tax appetites have an even bigger role with the expiration of the Section 1603 cash grant program," added Jeremy Fago, PwC's U.S. power and utilities valuation services leader. "There was significant renewable activity during the fourth quarter, but the deal values of many of the announced transactions were not made public."