Utility Week

UTILITY WEEK | 12TH - 18TH JANUARY 2018 | 23 Finance & Investment Market view T here was a record number of merger and acquisition (M&A) transactions in the UK utilities sector in 2017. This was mainly driven by a surge in solar deals as investors and developers reacted to the end of March deadline that marked the closure of the subsidy scheme for large-scale solar. While the total declared value of trans- actions dropped by more than half compared with 2016, a year that included the largest energy networks transaction of the past five years, it was still significantly higher than in the three years preceding 2016. The number of UK power and utilities M&A deals increased to 79 in 2017, compared with 50 in 2016. Solar deals more than tre- bled from 11 to 35, and there were 17 wind transactions in 2017, up from 11 in 2016. Ten water sector deals were completed in 2017, compared with nine in 2016. The total value of deals more than halved in 2017. While this is a big drop, 2016's deals included the largest transaction of the past five years: National Grid's sale of the majority stake in its gas distribution networks. Water deals accounted for nearly half the value of transactions and the total value of deals in the wind sector reached new heights. The privatisation of the Green Investment Bank (GIB) was completed in 2017. GIB was acquired by the Australian infrastructure investment group Macquarie, which aims to extend the reach of the fund beyond the UK and to emerging technologies. Rush for solar assets The 35 solar deals in 2017 were driven by the 31 March closure of the Renewables Obliga- tion subsidy scheme to all new generating capacity. Continuing the trend to consolidate asset portfolios, the majority of operating solar deals were acquired by institutional investors, including NextEnergy Solar Fund, BlackRock and Greencoat Capital. While the number of deals in the water sector in 2017 was similar to 2016, their value surged because of two large deals. The share- holder consortium including Infracapital and Morgan Stanley sold Affinity Water to a consortium of investors made up of German insurance company Allianz, the listed infra- structure fund HICL, and the Dutch Infra- structure Fund. The sale of Macquarie's remaining 26 per cent stake in Thames Water related to the realisation of its closed-end fund. In addition, three smaller transactions – the Australian fund manager Hastings Fund Management buying the remaining 50 per cent stake in South East Water, and Fiera Infrastructure and Omers Infrastruc- ture acquiring additional stakes in Thames – highlighted continued interest from investors looking for long-term, stable investments. Operating wind and EnTech Institutional investors also continued to build their operational wind asset portfo- lios. Greencoat UK Wind acquired a number of windfarms across the UK during the year, while JP Morgan Asset Management bought the controlling stake in Zephyr Investments, which operates 17 windfarms, and also acquired Infinis Energy's 19 operating sites. While there are a number of offshore windfarms under construction, ending sub- sidies for new onshore wind has halted the commissioning of new onshore windfarms. A handful of companies that focus on battery storage or on the provision of novel forms of energy, such as hydrogen-based fuel cell power systems, changed hands in 2017. This required a new category we have named energy technology, or EnTech. While the volume and value of deals in this cat- egory is still modest, the increasing interest in distributed and smart energy systems is likely to attract future investment. Looking forward The removal of government subsidies will continue to impact solar deals this year, but developers are starting to create profitable assets in a subsidy-free regime – for example by combining solar with battery storage. Ofwat's recent proposals for significant reductions in water sector returns in the next price control are likely to reduce investor enthusiasm in the medium term, and may stimulate exits in the short term. New types of political risk emerged in 2017 that may bring longer-term implications for M&As. A dra bill intended to give Ofgem the power to introduce a price cap on stand- ard variable tariffs may lead to the consoli- dation of suppliers, in particular among the retail arms of the larger utilities. In addition, Labour's pledge to renationalise utilities such as energy and water may have a damp- ening effect on investor interest in the sector. Other than reducing the value of sterling, Brexit has not had any noticeable impact on the volume or value of utility transactions to date. International investors looking for high-quality assets remain attracted to the UK, although it will be interesting to see if this appetite continues or investment pauses as the EU exit draws closer. Andrew Durrant, partner, and Dan Gambles, director, financial advisory energy and resources practice, Deloitte Solar swells M&A numbers Removal of subsidies led to a surge in solar deals in 2017, when the number of merger and acquisitions transactions reached a record level. What will 2018 bring, ask Andrew Durrant and Dan Gambles. ANALYSIS OF M&A DEALS IN THE UK UTILITIES SECTOR 90 80 70 60 50 40 30 20 10 0 Number of transactions 2012 2013 2014 2015 2016 2017 Other Energy tech Intermediaries Water Energy networks Nuclear Biofuel/waste-to-energy Power generation – hydro Solar Wind Power generation – thermal Note: 'Intermediaries' refers to consultancy companies in the UK power sector. 'Energy tech' refers to companies that develop new technologies in support of distributed and smart energy systems add. Source: Deloitte

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