Power and Utility M&A to Rise in 2001

If you were among those amazed by the virtual hailstorm of mergers and acquisitions in the power and utility sector this year, PricewaterhouseCoopers warns you haven't seen anything yet. According to an M&A forecast by the Transaction Services group within the firm, the "once sleepy and over-regulated [energy] industry" is the key M&A segment to watch in 2001.

The group pointed to numerous factors including the fact that utilities remain undervalued in relation to the S&P 500 based on historical discounts, despite the sector's strong stock performance year to date. The company said an abundance of value-unlocking opportunities remain for acquirers. Since unregulated independent power producers (IPP) are outperforming regulated utilities as the markets have placed a higher relative value on generating and trading assets, PricewaterhouseCoopers said to look for IPPs to arbitrage their strong stock and credit ratings to purchase generating assets from traditional utilities.

"The forces that drove M&A strategies in 2000 will accelerate in 2001. IPP's will continue to actively grow their generation portfolios and M&A will be a critical means to this growth. Utilities, in their quest to increase shareholder value, will accelerate their efforts to unlock the value of their generation and trading portfolios - either through disposals or spin-offs/split-offs," said Doug Meier, lead Transaction Services partner for the power and utilities industry at PricewaterhouseCoopers.

The group said expanding deregulation will force more utilities to merge and consolidate to survive in the market independently. These consolidations will create "super-regionals."

The company advises that besides the large domestic super-regionals, which will focus solely on being low-cost producers, there will be a surge of new era energy service companies much like the deregulated financial services and telecommunication industries have seen. This new style of energy company will aim to be a multi-service and technology provider. In order to evolve into a one-stop-shopping company, analysts said mergers, acquisitions, joint ventures and strategic alliances will be integral components.

The company also pointed toward global deregulation as a key factor for a strong M&A year.

"Economies of scale will continue to be an important rationale for utilities looking to implement their strategies of growth through geographic diversification," Meier said. "Finally, let's not forget the importance of globalization. Look for UK and European utilities to continue their expansion into the U.S. Similarly, I expect the U.S. IPPs and utilities to continue to selectively expand their presence outside of the U.S."

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