A look at due diligence for energy transactions, and at what’s driving them.
Tamir Druz is managing consultant at Towers Perrin. He can be reached at firstname.lastname@example.org.
By the end of last year, much was being made of the failed attempts at multibillion-dollar mergers by FPL with Constellation, Exelon with PSEG, and Southern Co. with Progress Energy. In spite of the repeal of the Public Utility Holding Company Act, these mega-mergers still required regulatory approvals from multiple state and federal agencies, and their high profiles attracted attention and resistance from a vast array of special interests.
But these failed attempts did not in any way impede overall deal flow in the marketplace for energy assets. Instead, they may have served to encourage capital flows into lower-profile yet less-regulated assets. These include physical hard assets such as merchant-power plants, but also structured deals, derivative portfolios, and even energy trading teams.
Interestingly, these types of assets comprise the traditional merchant-energy firm (see Figure 1). Once primarily owned by, and housed within, utility holding companies, alternative investors are discovering opportunities to realize greater returns on these assets. Financial buyers such as private-equity and hedge funds are able to exploit the strong cash flows of these assets through the application of leverage and financial risk-management strategies. Strategic buyers usually are more concerned with how these assets might complement their existing business portfolios and yield operational, geographic, or other synergies.