OREANDA-NEWS. February 03, 2009. The revival of nuclear power, continuing power utility company consolidation in Europe, and to a lesser extent in the US, and restructuring in the Russian Federation were the dominant themes behind the biggest deals of 2008, reported the press-centre of PricewaterhouseCoopers.

While number of deals soared, the value of deals plummeted as companies faced the new reality of the financial crisis and, in key markets, adopted a ‘wait and see’ approach to big acquisitions. The latest edition of Power Deals, the annual review by PricewaterhouseCoopers of power sector M&A, shows a 24% increase year on year in worldwide 2008 power deal numbers, up to 954 from 768 in 2007, but a 41% plunge in total deal value, down to US205.6bn from its record level of US372.5bn in 2007.

In each of the major markets — North America, Europe and Asia Pacific — deal numbers were up. While European entities dominated deal value, the incidence of deals was more evenly spread across the major regions worldwide — 35% in Europe; 29% in Asia Pacific and 24% in North America (by bidder). In all these regions, the pattern was similar — with deal numbers up but values down.

Manfred Wiegand, global utilities leader, PricewaterhouseCoopers commented:

“The billion dollar question on the outlook for deal-making is, of course, how long we will have to wait for liquidity to return to the debt markets. Also of importance will be the speed at which climate change policy is clarified in the first year of the Obama presidency and in the run-up to the December 2009 UN Climate Summit in Copenhagen.”

Key trends highlighted by the Power Deals 2008 report include:

Nuclear deals in the spotlight

The revival of nuclear power is being reflected in a race among the big players to position themselves globally to capitalise on planned expansion. France’s EDF took the spotlight in 2008 as it went on the acquisition trail in the UK and the US for nearly US30bn of assets — in deals with British Energy and for the nuclear generation portfolio of Constellation Energy. The nuclear revival also spurred a number of non-M&A joint venture deals between utility companies and nuclear technology and construction companies.

Gas players sit tight
Gas deals were notably absent as holders of gas assets sat tight on valuable reserves and comprised 11.6% of all power deals and just 7% of total power deal value. The tight hold companies are exerting on gas was highlighted by Origin Energy’s successful resistance to BG Group’s US\\\\$13.3bn takeover bid.

Key markets
Russian Federation
The three deals in the top ten were from the Russian Federation. They came early in 2008 and saw some of the final pieces of the Russian energy restructuring jigsaw being put in place.

Elsewhere, the Russian Federation bucked the trend of rising deal numbers. Numbers leveled off in the Russian Federation. Total Russian target deal value fell by more than two–thirds — from US\\\\$79.5bn in 2007 to US24.3bn in 2008. The fall in numbers and value reflected a tailing off in the number of deals attributable to the reorganisation of the Unified Energy System (UES) which had inflated deal volume in 2007.

Ten of the 41 international moves by European entities were power investments in the Russian Federation, led by Finland’s Fortum Oyj’s US3.8bn investment in former UES assets. The sometimes difficult landscape for such moves was highlighted by events surrounding RWE’s attempted US646 million purchase of Russian power generator TGK–2, another former UES asset, together with Russian energy group Sintez.

RWE began talks with Sintez to take joint control of TGK–2 early in 2008 but pulled out of the deal in September citing the high cost of the transaction and turbulence in Russia’s financial markets. Subsequently it faced a reported US\\\\$1.4bn legal claim for US1.41bn from Sintez for abandoning the deal (Financial Times, 11 November 2008). The remaining eight Russian moves by European entities were all investments by banks for sums ranging from US1 million to US150 million.

North America
While bidder numbers rose by up to 58% in North America, total value fell by 54% (from US\\\\$87.5bn in 2007 to US40bn in 2008). This was mainly due to the absence of mega-deals on the scale of US\\\\$21.6bn Kinder Morgan and US43.8bn TXU. Excluding these two mega-deals from previous year totals, underlying bid activity by North American entities was comparable with those in previous years — US32.9bn in 2006, US\\\\$43.7bn in 2007 and US40bn in 2008.
Europe.

Europe loomed large in terms of the geographical distribution of deal value, accounting for more than half of the worldwide value of all deals — 58% by bidder and 53% by target. The impact of Europe on 2008 power deal totals was driven by the number of large deals involving European companies. Six of the ten biggest deals and 45% of all US\\\\$1bn plus deals were from European bidders.

Asia Pacific
Total 2008 target deal value fell to just US25.9bn, a 49% fall from US50.4bn in 2007. Asia Pacific bidder activity was similarly down — by 42%, from US47.6bn in 2007 to US27.4bn in 2008. All but 3% of target value was for electricity assets. As in other regions, owners sat tight on valuable gas assets.

The value of deals for Australian targets plummeted from US19bn (37.7% of all Asian Pacific target value) in 2007 to just US\\\\$1.75bn (6.7% of all Asia Pacific target value) in 2008. The majority of Asia Pacific bid activity came from Chinese and Japanese entities. Together Chinese and Hong Kong–based bidders accounted for US9.8n (35% of all Asia Pacific bidder value).

Michael Knoll, Head of M&A Lead Advisory / Corporate Finance, said:

“The coming year will be one of obstacles and opportunities. The constrained availability of finance will inhibit deal activity and, until that situation is eased, there is unlikely to be a revival in deal values. But with some businesses running short of cash for needed expansion or facing refinancing challenges, businesses and assets may become available for corporates with strong balance sheets and cash flows.”