A recent report by Ernst & Young (the Report) has concluded that the power and utilities (P&U) is thriving, as global deal value in the first quarter of 2018 reached an all-time high of US$97 billion. This rise has predominately been driven by mega-deals, with only 15 deals forming 90% of the total global deal value in the P&U sector. Owners of P&U assets can continue to expect premium asset valuations and highly favourable transaction terms as investors compete for a limited amount of attractive investment opportunities within the sector.

The Report identifies the following factors as contributory factors in the significant rise of deal value in Q1, 2018:

Demand based factors:

  • Shortage of desirable investment opportunities: investors have been attracted to large global network deals, which are becoming increasingly scarce.
  • Increased attractiveness of renewable energy investment: nearly half of all investments were in renewables. This increase was driven by support from government policies and reduced input costs for renewable energy production.
  • Increased interest in supporting technologies: the increased use of renewables and electrical vehicles have increased demand for investment opportunities in their supporting technologies. Examples include: batteries, infrastructure, and electrical vehicle charging stations.
  • Demand for integrated assets in the Americas: investments in specifically US integrated assets represented 57% of P&U investment for the Americas.

General macroeconomic factors:

  • Historically low interest rates
  • Robust access to capital markets
  • High stock valuation currency

Not all P&U sectors have faced the same growth. There was a decrease in the deal value in the coal generation industry and a regional divide in interest for nuclear energy investment opportunities. Investors are weary of the coal industry as many governments are developing policies with the goal of reducing or freezing coal generation. With regards to nuclear energy, investment in developed countries is decreasing due to oversupply and unattractive profit margins. In contrast, investment in nuclear energies is generally increasing in developing countries due to a growing demand for electricity.

Both sellers and buyers in the P&U sector should remain aware of investment and valuation trends as they will be significant in the negotiation of both asset pricing and contractual terms.

The author would like to thank Arron Chalal, summer student, for his assistance in preparing this legal update.

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