International utility executives gathered in London this week believe that increasing deregulation will continue to drive mergers and acquisition activity in the European utility market. Nearly half of executives surveyed (48%) said the main drivers in Europe are deregulatory progress and the need for utilities to gain new market share. But nearly 40% said that regulatory scrutiny would delay most deals.

Executives were split on the likelihood of additional M&A activity in the United States, despite the recent repeal of U.S. laws that have restricted mergers and acquisitions among utilities:

• 32% think 2006 will be the Year of the Utility Merger.
• 32% believe most utility companies don’t yet see the benefits of M&A strategies.
• 28% view regulatory scrutiny as delaying the completion of most deals.

On both sides of the Atlantic, respondents believe that the ability of generation and commercial synergies may or will absolutely increase the viability of M&A strategies for the utility sector (96%). And, respondents believe that the ability to create synergies and efficiencies in back office management may or will absolutely increase the viability of M&A strategies (96%). Also, the study found that nearly three in four executives (71%) believe more business process outsourcing of finance, human resources and IT functions is likely in the future because it strengthens balance sheets and generates free cash flow that can be invested elsewhere in the business.

A fourth of respondents said utilities should “absolutely” outsource horizontal processes before a merger or acquisition to gain immediate cost savings. And another 54% said utilities “maybe” should outsource.

The Pulse survey of 24 utility executives, representing 63% of utility attendees at the Edison Electric Institute (EEI) International Utility Conference, was conducted by Capgemini.

“The Capgemini survey shows that a majority of utility industry executives are convinced that consolidation will sweep utilities on either side of the Atlantic,” said Colette Lewiner, senior vice president and Global Energy & Utilities Leader, Capgemini. “Clearly more transformational outsourcing will take place to achieve needed synergies as consolidation continues in the industry. But, as our survey suggests, the pace of consolidation could be slowed down by regulatory obstacles.”

Other key findings from the Capgemini pulse survey at the EEI International Utility Conference:

• 54% of executives are less positive about the security of supply in Europe than they were 12 months ago. Only 4% are more positive about supply security and 42% are unchanged.
• 60% expect their company’s investments in technology projects to increase in 2006, while 40% expect their investment levels to stay the same as 2005.
• 30% of executives are less positive than they were 12 months ago on the state of electricity deregulation in the European Union. Nearly 20% are more positive.