If you were among those amazed by the virtual hailstorm ofmergers 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 groupwithin 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 thatutilities remain undervalued in relation to the S&P 500 basedon historical discounts, despite the sector’s strong stockperformance year to date. The company said an abundance ofvalue-unlocking opportunities remain for acquirers. Sinceunregulated independent power producers (IPP) are outperformingregulated utilities as the markets have placed a higher relativevalue on generating and trading assets, PricewaterhouseCoopers saidto look for IPPs to arbitrage their strong stock and credit ratingsto purchase generating assets from traditional utilities.

“The forces that drove M&A strategies in 2000 willaccelerate in 2001. IPP’s will continue to actively grow theirgeneration portfolios and M&A will be a critical means to thisgrowth. Utilities, in their quest to increase shareholder value,will accelerate their efforts to unlock the value of theirgeneration and trading portfolios – either through disposals orspin-offs/split-offs,” said Doug Meier, lead Transaction Servicespartner for the power and utilities industry atPricewaterhouseCoopers.

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

The company advises that besides the large domesticsuper-regionals, which will focus solely on being low-costproducers, there will be a surge of new era energy servicecompanies much like the deregulated financial services andtelecommunication industries have seen. This new style of energycompany will aim to be a multi-service and technology provider. Inorder to evolve into a one-stop-shopping company, analysts saidmergers, acquisitions, joint ventures and strategic alliances willbe integral components.

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

“Economies of scale will continue to be an important rationalefor utilities looking to implement their strategies of growththrough geographic diversification,” Meier said. “Finally, let’snot forget the importance of globalization. Look for UK andEuropean utilities to continue their expansion into the U.S.Similarly, I expect the U.S. IPPs and utilities to continue toselectively expand their presence outside of the U.S.”

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