Even before Covid-19, deal activity in energy, utilities and resources had declined in the wake of economic slowdown, geopolitical and trade tensions. But the decarbonisation megatrend has not gone away, and may even be accelerated by governmental stimulus measures triggered by the pandemic. While there are unlikely to be many megadeals in the near future, there is still pressure on large corporates and private equity to find targets that will help them capitalise on the energy transition. How do the observations in PwC’s recently published global M&A insights compare with what we are seeing in Switzerland?
Three main themes driving M&A activity:
Carbon neutrality and the energy transition are profoundly transforming the energy sector and the demand for the fossil fuels that currently drive it. Recent government initiatives have prompted major players to make big commitments to reducing emissions, and many are seeking to deliver on these promises by acquiring green technologies and capabilities.
Following Europe’s lead, Asia is now also starting to seriously move away from reliance on oil and gas to electricity and new energy sources. Despite low oil prices and the economic uncertainty created by the coronavirus, we expect Covid-19 packages designed to foster green technologies to accelerate the shift to renewable and low-carbon energy.
- Value creation
Business is learning many lessons from Covid-19, and this will result in opportunities to create and preserve value as companies seek to repair, rethink and reconfigure. The opportunities are likely to take many forms, including traditional M&A, asset swaps, asset spin-offs, joint venture asset pooling and strategic alliances or partnering. In the wake of coronavirus and ongoing global trade conflicts, many companies will be seeking ways of assuring more secure supply chains and greater cost certainty. This might involve diversifying the supplier base and sourcing more locally, relocating manufacturing facilities closer to customers or the source of raw materials, investing in technology for real-time demand planning and supply chain visibility, and further reducing the risks by bringing the sourcing of materials and services in-house – all of which can be implemented by way of acquisitions.
All this also points to greater digitalisation. While companies in the energy, utilities and resources sector have so far been fairly slow to digitally transform, more and more will be seeking to automate by acquiring tech providers.
- Asymmetric recovery and deal making
As governmental stimulus packages wind down and the economic effects of Covid-19 play out, many businesses will experience high levels of distress – especially given the uncertainty on the speed and form of the recovery. We are likely to see companies with solid balance sheets and cash flows opportunistically target those with liquidity problems but solid business models.
As some territories – particularly those where there was more governmental support – recover more quickly than others, the global recovery from coronavirus will be asymmetric, creating cross-border M&A opportunities. On the other hand, travel restrictions are making it harder to assess and pursue deals abroad, so companies might be more likely to look for potential candidates locally first.
And then, of course, there is oil. The crash in oil demand, combined with the OPEC+ price war, has hit the oil and gas value chain hard and might be irreversible in some cases given the expected permanent changes in the way people move around. With volatility so high and prices so low, valuation is highly problematic – a challenge both buyers and sellers will have to contend with.
“The decarbonisation megatrend and the precarious status of oil will continue to fuel M&A in the energy sector – with some of the most important developments driven by Europe. But with such huge uncertainty prevailing, I expect buyers and sellers to be more structured, creative and flexible in the way they approach deals.”
What about M&A in the Swiss energy, utility and resources sector?
Zooming in on Switzerland, we have been observing strong M&A activity fuelled by the industrial megatrends decarbonisation, digitalisation and decentralisation. As an example, Swiss power and utility company BKW has been one of the most active buyers for years, complementing its traditional power generation and grid portfolio with a vast range of services consisting of building solutions, infrastructure services and engineering services. Other players have been reviewing their portfolios, selling non-core activities and building up new capabilities with M&A. We have already seen Alpiq selling a large part of its energy services business and Axpo making a bold move into solar PV by acquiring French project developer Urbasolar. We expect the power and utilities companies to recover fast from the pandemic owing to their strong capital and liquidity base. This will enable them to pursue their inorganic transformation path unhampered, utilising attractive post-Covid valuations and profiting from large governmental green initiatives. Power and utilities companies are therefore likely to be winners in the post-Covid world, along with institutional and private infrastructure investors.
Meanwhile, energy and resources companies are suffering heavily from the crash in demand, resulting in non-economic price levels, for example for oil and coal. We therefore expect these companies to reinvent their supply chain, consolidate their businesses and reduce their fossil fuel exposure much faster than planned pre-Covid. With that said, transactions around hydrogen, both for fuel cell vehicles as well as for synthetic renewable fuels, will become one of the top M&A trends in the near future.
To summarise: shaken, but ready for action
A perfect storm of energy industry transformation, economic uncertainty and price volatility – whipped up by Covid-19 − will inevitably create waves on the M&A scene that skilful, risk-aware buyers and sellers can ride to their advantage. We do not foresee many megadeals in the near future, but there will be opportunistic activity – and it will be disciplined.
Given the complexity of the forces driving M&A activity going forward, buyers and sellers will have to be increasingly structured, creative and flexible in the way they assess and structure deals. This will include finding new ways of doing due diligence despite travel restrictions, including remote technologies and comprehensive data analytics.