Aggressive regulatory reviews and the midterm elections dulled North American electricity and natural gas utility merger and acquisition (M&A) activity last year, and U.S.-based power utilities failed to complete any “big deal” transactions, according to corporate consultant PricewaterhouseCoopers (PwC).

Total North American M&A deals in the utility/gas sector topped out at $54.5 billion, but two transactions alone captured nearly all of the value: the management-led buyout of gas pipeline operator Kinder Morgan Inc. (KMI), which PwC valued at $21.56 billion (see NGI, June 5, 2006), and National Grid plc’s $12.4 billion bid for KeySpan Inc. (see NGI, Oct. 23, 2006; March 6, 2006).

Neither KMI’s or KeySpan’s transactions are being completed by North American utilities. The KMI buyout is being privately financed by founder Rich Kinder and a group of investment bankers. National Grid is based in the United Kingdom.

“In contrast, American power utilities declined to make any big deal bids,” noted PwC. “Were it not for the Kinder Morgan and KeySpan deals, total target values in North America would be down 40% from 2005 levels.” Excluding gas utility deals, North American electricity M&A fell 64% to $20.7 billion.

“Many people thought the repeal of the Public Utility Holding Company Act would provide a green light to increased deal activity but, in its absence, some state public service commissions (PSC) are stepping in and placing new and greater restrictive conditions on proposals,” said PwC’s John McConomy, U.S. Power and Utilities Transaction Services leader. “The actions of Maryland PSC and the New Jersey Board of Public Utilities were a huge factor in the decision to take the proposed mergers of Exelon and PSEG, and FPL and Constellation off the table during 2006” (see NGI, Nov. 27, 2006; Oct. 30, 2006).

“Something will have to give,” McConomy said. “Stock market earnings per share growth expectations are way above what companies can achieve in most territories from organic growth alone. The power sector remains very fragmented in the U.S., with huge scope for consolidation.”

While U.S. M&A activity in the utility sector tumbled, Europe and the Asia Pacific region set new records. Total offers worldwide soared to $298.8 billion, about one-third higher than the $196 billion record set in 2005, and seven times the $43 billion in transactions recorded in the sector in 2003.

“We are seeing record deal levels but, more than ever, it is regulators and politicians that are deal makers or breakers in the utilities sector,” said PwC’s Manfred Wiegand, Global Utilities leader. “The downturn in the U.S. comes as companies hold fire in the wake of moves by state-level regulatory commissions and the cancellation of two big deals.”

Just two years earlier, in 2004, PwC noted that North American utility M&A actually surpassed European transactions. However, in the past 12 months, a $136.1 billion chasm opened up as European players captured $190.6 billion worth of targets, nearly four times their North American counterparts. The number of European bidders jumped 25% over 2005, and the total value of European M&A targets increased by 56% from the year before.

By PwC’s estimation, only one bid in 2004 and one bid in 2005 had ever eclipsed the $20 billion mark. Four deals shattered that ceiling in 2006. E.ON’s $66.12 billion bid for Endesa SA and Suez SA’s $43.07 billion attempted merger with Gaz de France “moved bid levels into ‘mega-mega deal’ territory…” the report noted. IBERDROLA SA’s bid for Scottish Power plc, valued at $22.95 billion, was the third-largest offer. KMI’s bid was ranked as the fourth-largest of the year, while KeySpan’s acquisition by National Grid was ranked fifth.

PwC’s “Power Deals 2006 Annual Review” was compiled using published transactions from the Dealogic M&A global database published in December. The analysis includes 623 global transactions that may be pending legal and financial closure, as well as those transactions that have been completed. All of the transactions reviewed included assumed debt. For PwC’s complete list of 2006 transactions, visit www.pwc.com/energy .

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