Despite differences from sector to sector, M&A activity in the energy, utilities and resources (EU&R) sectors continued to increase in the first half of 2021. Even though supply and demand are stabilising in line with economic recovery, businesses are still focused on capital discipline and shareholder value. This could slow dealmaking as many companies seek deals to earn accretive returns faster than other capital investment options. On the other hand, macroeconomic and investor confidence suggest that M&A activity will remain strong for the rest of 2021, subject to global trade tensions and the uncertain outcome of elections in some energy and resource-producing countries. As in other industries, the capital landscape in EU&R is evolving rapidly, thanks in large part to ESG activism. Decarbonisation, previously focused on Europe, has now gone global, and will continue to influence deals activity and project investment decisions in this industry. These are some of the findings of PwC’s recently published global M&A insights. What’s the story in Switzerland?
Four main themes driving M&A activity:
1. Capital availability
On the whole there is plenty of capital available for dealmaking. Interest rates are likely to remain at record lows for the rest of the year. And there is significant special purpose acquisition company (SPAC) activity, notably in deals related to the energy transition.
On the other hand, carbon-intensive products and companies with major ESG risks are finding it harder and harder to secure finance and insurance, and those trying to meet ESG obligations by getting rid of carbon-, water- and land-intensive assets are already finding buyer pools and sources of capital shrinking.
As reported in our last post, in this environment more nuanced investment strategies focusing on different aspects of the climate/ESG transformation are emerging, each designed to attract different pools of investors: legacy optimisation (targeting assets in structural decline such as upstream oil and gas, thermal coal and nuclear generation), net zero rent (focusing on lower-risk net zero assets), net zero growth (aiming for higher-risk net zero assets) and net zero pivot (large companies focused on strategic net zero assets).
2. Post COVID-19 recovery
Dealmaking in the EU&R sector will be affected by a continued recovery in the global energy, utilities and resources markets in the first half of this year. Increased vaccination rates are enabling key economies to open up, boosting demand for energy and resources. As government support for the energy and resource sectors dries up, we’re likely to see an increase in global restructuring.
3. Geopolitical trends
Another factor affecting how businesses in the energy and resources sectors think about M&A strategy is political and regulatory changes. Uncertainty exists in various guises, from geopolitical responses to COVID-19 recovery and ongoing trade tensions to changes in government, all of which might trigger higher inflation, slower growth, regulatory change, social unrest, increased royalties or higher corporate and resource taxes. All this uncertainty could potentially discourage or delay M&A activity in the regions affected.
The COVID-19 experience has transformed the behaviours and priorities of consumers and employees, with a sharper focus on societal, equality and climate change-related issues leading to a much greater emphasis on ESG considerations. Investors and stakeholders are increasingly making ESG a key priority and seeing the good of society and profitability as intertwined.
In recent years it had been Europe that had led efforts to decarbonise. But Asia is increasingly following suit, and there are signs that the US is also re-committing to action on the climate. Decarbonisation has gone global – and we expect this global footprint to drive a higher volume of net zero related deals in the near to medium term.
Major energy and resources companies have been divesting carbon-intensive assets as a means of decarbonising. But the effectiveness of these efforts in terms of actually reducing global carbon emissions is increasingly questioned, and it may be that companies will have to hold and wind down these types of assets rather than selling them.
Global Energy, Utilities & Resources Deal Volumes and Values
Global Energy, Utilities & Resources Average Deal Values
What about M&A in the Swiss energy, utility and resources sector?
In Switzerland we’re seeing a high level of M&A activity with a focus outside companies’ traditional playing fields, for example energy companies heavily investing in renewables or utility companies tackling new fields like hydrogen. In addition, we still see a lot of activity from financial investors, which is consistent with newly formulated asset-light strategies at energy and utility companies.
Looking ahead: make or break for decarbonisation
Now that the transition to carbon neutrality is truly global, companies in the energy, utilities and resources sector still have crucial strategic decisions to make: when and how do we play? Some will choose to continue operating and pursuing legacy assets and industries as cost-efficiently as possible, while others will embark on a new road to decarbonisation via integrated service offerings or completely new business models. Both options come with risks and rewards. These decisions will shape the M&A landscape in energy, utilities and resources.
“The traditional hard delineation between oil & gas, power & utilities and technology companies is eroding, partly driven by transformation to net zero. This development is clearly seen in current M&A activity.”