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20 | 13TH - 19TH JANUARY 2017 | UTILITY WEEK Finance & Investment Market view D espite market uncertainties, the UK power and utilities sector saw the number and value of mergers and acquisitions (M&A) surge in 2016. The value of deals increased more than five times, while the number of transactions grew by a quarter. This analysis is based on UK M&A trans- actions in the generation (thermal), renew- ables (wind, solar, hydro and biomass), nuclear, water and waste, energy networks and intermediary sectors. Most of the growth in deal volumes was driven by the water sector, mainly due to a growing sense that companies and investors have now worked through the detail behind PR14 and therefore feel comfortable in progressing transactions. Notwithstanding cuts in subsidies, renewa- ble deals continue to dominate the UK power and utilities M&A landscape. Stakes in five UK energy networks also changed hands during the year. The number of M&A deals increased to 50 in 2016 compared with 40 in 2015. The number of deals in wind more than doubled and, combined with solar, made up nearly half the volume of transactions in 2016. The water sector registered the largest increase in the number of deals, where the number of transactions grew from one to nine. The value of deals tripled over 2015. Most of this growth was down to a handful of large transactions, as there were four deals above £500 million compared with none in the pre- vious year. These transactions were spread across a number of sectors, including energy networks, wind and "other" (such as inte- grated utility Viridian). The water sector saw the number of deals grow significantly in 2016. Although PR14 brought certainty to the market, it took some time before water utilities worked out what impact it would have on the value of their businesses. Companies and investors now seem comfortable with life under PR14, and transactions have been spurred by several closed-end infrastructure funds maturing. The number of water sector deals was also boosted by activity around water purification and non-household retail businesses. In the renewables sector, subsidy cuts have not deterred deals. The acquisition of operating assets by listed funds continued to drive M&A activity in solar and wind. Despite subsidy cuts for new assets during the year, the number of operating solar assets chang- ing hands was high at 11 in 2016, compared with 16 in 2015. While investment in developing offshore wind assets continues to be strong, the progressive reduction in subsidies means that interest in funding and building new solar and onshore wind assets is expected to wane. At the same time, consolidation of assets in the hands of financial investors is likely to continue. There has been little interest in investing or building coal or gas-fired power stations in recent years and this trend continued in 2016. There were two transactions during the year and they related to distributed power generation companies rather than operators. While a significant number of coal sta- tions have already been phased out under the European Industrial Emissions Directive, remaining coal power generation has also lost its price advantage over gas. This is due to the introduction of the carbon price floor in 2013 and market price swings. Although there is interest in investing in gas-powered stations (either through acqui- sitions or construction), the debate around if and how the country will procure a new wave of gas plants for energy security in the future continues. 2016 also saw a return to high value trans- actions in the energy network sector, aer a few years of relatively light activity. National Grid recently announced a deal to sell a 61 per cent stake in its gas distribution business to a consortium led by Macquarie Infrastruc- ture and Real Assets, and SSE sold 16.7 per cent of Scotia Gas Networks to the Abu Dhabi Investment Authority. There were further deals involving Energy Assets Group, Ele- cLink and International Energy Group. The UK government has started the pro- cess of privatising the Green Investment Bank, with Macquarie emerging as the pre- ferred bidder. This transaction is expected to complete in the first quarter of 2017. We are also likely to see other divestments of stakes in water companies, further utilities invest- ment in smart metering, combined heat and power capabilities, better customer and home management systems, as well as deals in the independent energy retail sector. Brexit has not had an obvious negative impact on foreign investor appetite for UK energy assets so far. This may partly be due to only six months having passed since the vote and Article 50 not yet having been trig- gered, but it also reflects that the declining exchange rate benefits inbound investment, which is prevalent in this sector. The over- seas acquisition of National Grid Gas and SGN assets is an example of this. Neverthe- less, Brexit brings a level of uncertainty that may have a longer-term impact on the UK's economic growth, which in turn could poten- tially reduce demand for energy or returns on investment into energy assets. James Leigh, Andrew Durrant and Dan Gambles, Deloitte 2016 was a good year for M&A The past 12 months saw a healthy number of deals in all utility sectors, driven by a water sector getting to grips with PR14. James Leigh, Andrew Durrant and Dan Gambles analyse the numbers. M&A DEALS IN THE UK POWER AND UTILITIES SECTOR Source: Deloitte 60 50 40 30 20 10 0 Number of transactions 2012 2013 2014 2015 2016 Source: Deloitte analysis based on MergersMarket data Note: 'Intermediaries' refers to consultancy companies. 'Other' includes deals that do not fit into any other category, for example utility services Other Intermediaries Water Energy networks Nuclear Biofuel/waste-to -energy Hydro Solar Wind Generation (thermal)