Will shifting winds bring consolidation?
John McConomy is the lead partner in the transaction services power and utilities practice of PricewaterhouseCoopers LLP, based in Philadelphia. Email him at john.mcconomy@us.pwc.com.
A spate of deal announcements in early 2010 has the power and regulated utilities industry cautiously optimistic about a merger and acquisition (M&A) revival. Two of the largest deals include the proposed $9.27 billion acquisition of Allegheny Energy by FirstEnergy and PPL Corp.’s announced acquisition of the assets of E.ON US for $6.73 billion.
Although it’s difficult to conclude whether the recent activity indicates any lasting trends, a wave of industry consolidation might be building, especially if the recently announced deals reach the finish line. If those deals receive timely and satisfactory regulatory approvals, the industry should anticipate more M&A activity on the regulated side. Consolidation within the sector is attractive because of its potential to enhance growth, reduce costs, and boost stock values. When power and utility companies take advantage of economies of scale or serve a larger customer base, they have the opportunity also to operate more efficiently and perhaps more profitably, if the regulators allow them to retain reasonable synergy savings. Generally, the more scale there is, the stronger the balance sheet. Scale also could translate into enhanced credit ratings and cost synergies.