The developments of the first few months of this year have shown just how difficult it can be to predict the future – even the near future. Dealmaking in the energy, utilities and resources sector is no different, and the level of activity in the first six months of 2022 has been lower than we anticipated at the beginning of the year. This is reflected in both the number of deals being made and the time it’s taking to agree valuations and actually execute transactions.
Considering the uncertainty in deal pricing in the current environment of rising inflation, interest rates, geopolitical upheaval and commodity price volatility, the lull in activity isn’t surprising. Nevertheless, the fundamental drivers we identified in our last review of developments basically remain in place, and despite the uncertainty we anticipate robust dealmaking in the near to medium term. These drivers include a plentiful supply of capital, the continuing acceleration of the energy transition, an increasing desire to assure secure supply chains, and business leaders’ perception of value opportunities in the prevailing macroeconomic environment.
An interesting space to keep an eye on at the moment is discussions around the ethical stewardship of carbon-intensive assets and the implications this has for M&A activity. For example, in some cases there have been adverse investor reactions to companies trying to demerge or divest more carbon-intensive assets ‒ moves that it’s feared may result in a rise in carbon emissions. Companies planning to sell assets of this sort will have to negotiate with a broad and diverse range of stakeholders and adapt their M&A strategy to avoid accusations of greenwashing and the risk of throwing the divestment process off track.
Global M&A trends in energy, utilities and resources
Here is a brief summary of what to look out for in the various segments of the energy, utilities and resources sector:
Mining and metals: ESG and supply chain security are still the main drivers of M&A in this segment, and have been subject to even greater corporate and government scrutiny so far this year. Competition for M&A opportunities to secure the supply of critical minerals such as copper and nickel is intense. Some players are shifting portfolio focus from carbon-intensive assets to critical minerals. With the possible exception of China, deglobalisation is picking up momentum, which looks likely to redraw M&A boundaries and lead to a decline in the volume and a change in the direction of capital flows in cross-border deals.
Oil and gas: With high, volatile commodity prices having forced global oil and gas M&A to take a breather, M&A activity should pick up again if prices stabilise. With a mounting energy crisis emerging, around the world there is growing tension between a desire to transition to clean energy and the need to assure security of supply. Gas in particular is a hot topic that will have to be addressed. A loss of low-cost production (e.g. because of businesses exiting operations in Russia) is probably going to have a financial impact that will have to be negotiated by the companies affected.
Chemicals: Despite a slow start to the year, the M&A outlook is still positive. Even though there are potential headwinds in the form of macroeconomic events and the continuing effects of Covid, many of the factors driving M&A we identified early this year still apply: chemical companies focusing on carbon reduction and circularity; corporates seeking to increase supply chain resilience; and high valuations due to the availability of plentiful capital and competition for quality assets.
Power and utilities: Inflationary pressures and rising interest rates are starting to widen the value gap in power and utilities M&A. Supply chain challenges (e.g. solar panels and other components) are affecting the decarbonisation transition. Sustainable energy targets continue to create an investment-friendly environment, which is good news for traditional renewable technology, transmission infrastructure, carbon capture, battery storage, hydrogen and other climate technologies.
“The recent lull in energy dealmaking was time out to rethink strategy and tactics in an environment of uncertainty. With ESG, climate and supply chain issues, as well as the search for long-term value, all very much front of mind, M&A activity looks set to pick up in the near to medium term.”
What about M&A in the Swiss energy, utility and resources sector?
Axpo, the largest Swiss utility company, is aiming to grow significantly in renewables, in particular photovoltaic and wind, but also in hydrogen and energy storage. The market leader is also working on growing its trading and origination business units and focusing on growth pockets in the Swiss market. Against the backdrop of this strategy, Axpo closed several deals in the first half of 2022, including the sale of its 13% stake in Swiss utility Repower, the sale of a 65 MW wind portfolio in France to Greencoat, and the sale of a 66 MW wind asset in Italy to Edison S.p.A. - plus various large PPA contracts with corporate clients. Axpo’s development pipeline includes wind farms with an installed capacity of 3.5 GW. In the PPA market, the company markets about 19.7 GW of solar and wind energy for its customers. BKW, the Swiss energy and infrastructure company, which has been an active buyer for years, reinforced its growth strategy and intends to increase its revenue to more than CHF 4.5 billion and its EBIT to over CHF 700 million by 2026. As part of this growth initiative, BKW has acquired IT service provider UMB to boost its digital transformation competence, expanded its portfolio of renewables with the acquisition of a 106 MW wind portfolio in France, and has become the leading Swiss company in the photovoltaic installation and services market with the acquisition of Solstis SA. We expect Axpo, BKW and Swiss infrastructure funds to be the most active buyers in the second half of 2022.
Looking ahead: plenty of fuel for a pick-up in dealmaking
Against the broader backdrop of the energy transition, recent developments on the global and macroeconomic fronts have focused even more attention on the cost and availability of energy. In the medium to long term we see the best prospects for creating value and sustained outcomes for stakeholders at organisations whose M&A strategies are closely aligned with their corporate vision. We’re thinking in particular of companies in high-growth businesses such as renewables, carbon capture, battery storage, transmission infrastructure and other clean technologies.
Mid-year outlook: healthy M&A activity despite lack of economic and sociopolitical certainty
Despite an unpredictable operating environment dominated by economic and sociopolitical uncertainty, M&A activity in the health industries will remain lively. PE funds have significant dry powder at their disposal, and large corporates are still endeavouring to achieve growth through deals and softer biotech valuations might fuel M&A from big pharma to fill their pipeline. With PE and corporate capital competing to acquire innovative small and medium-sized businesses with new technologies and digital capabilities, dealmakers are in for a busy time in the remainder of 2022.
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