Can consolidation create sustainable long-term value, or will it prove seductive but, ultimately, disappointing to shareholders, employees, customers, and management alike?
Where Have All the Mergers Gone?
EPACT and the repeal of PUHCA have not affected the pace of utility acquisitions.
now and 2030; $32 billion in transmission over just the 2006-2009 period; $13 billion to $14 billion in distribution per year for the next 10 years; and $50 billion in new environmental expenses through 2025 (and more if there are stringent CO 2 regulations). 1 This unprecedented need for capital will favor utility acquisition by those able to raise and sustain the level of investment required.
Limited non-utility participation in utility M&A will continue. We expect that the primary (if not the only) segments that will undertake utility M&A for the next several years will be the two that have done so in the past few years: existing U.S. utilities (whether owned by foreign entities or domestic ones) and hedge/equity funds. The recent offer for TXU by TPG and KKR is a prime example of the latter type. It is an open question as to whether the funds will have a continuing appetite for utility acquisitions outside of “marquis” deals, given the questions that regulators tend to have about their long-term commitment and the limited upside on returns, unless the utility can be split into regulated and unregulated entities.
Collectively, we expect these factors to lead perhaps to a somewhat higher level of activity than in the “steady state” period just before and after the passage of EPACT, but nothing close to the level expected before the legislation was passed.
The utilities industry will be exciting in coming years for many reasons—but an abundance of utility M&A deals will not be one of those.
1. Figures provided by David Owens, EEI Executive Vice President, in a presentation to the NARUC Winter Meetings on February 19, 2007.