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The Race to Consolidate
Positioning to win in the contest for scale.
In the last decade, the utilities industry has behaved more like the tortoise than the hare in the race to consolidate. While companies in sectors such as telecommunications, banking and oil have actively joined forces and reshaped their industries, utilities have followed a conservative route toward mergers and acquisitions (M&A). Recent trends indicate that utilities are no longer idling on the starting line—in the past 18 months alone we have seen a greater growth in the concentration of the top players in the industry than in the preceding 10 years.
Now, the forces for continued fragmentation are being overshadowed. Even the stringent regulatory environment can’t compete with decreased avenues for earnings growth, increasing demands for capital expenditures, declining returns on equity, and other factors that are accelerating the pressure to consolidate. In the last 10 years, the number of investor-owned electric utility holding companies in the United States has declined from 69 to 51, a trend we expect to accelerate, leading to less than 40 U.S. investor-owned electric utility holding companies by 2020. Some companies are better positioned than others to drive consolidation—and some need to reevaluate their strategy based on their positioning if their ambitions are to grow through M&A. So how can utilities industry players better prepare themselves for the race to consolidate?
Evolving from the 19th century, the utilities sector is one of the most established industries. Yet for many years, competition was far from encouraged. Then, in 2005 Congress lifted the regulatory constraints of the Public Utility Holding Company Act of 1935. A number of other market and economic forces also came into play, putting utilities on track for more consolidation. Indeed, the U.S. utility sector experienced a spike in M&A announcements in 2011 that exceeded the total value for all deals in the previous three years.
Accenture has evaluated the key players according to their readiness to lead consolidation through a successful merger and acquisition strategy, analyzing 50 electric and electric-gas combination utilities. This analysis suggests the industry has now turned the corner on the drive to consolidation—and many companies are surprisingly unprepared.