Asset Financing Investments and M&A Surged in the Power Industry Market in Q2 2010

03 Sep 2010 • by Natalie Aster

GlobalData’s “Power Quarterly Deals Analysis M&A and Investments Trends - Q2 2010” report is an essential source of data and trend analysis on the Mergers and Acquisitions (M&A) and financings in the power industry market. The report provides detailed information on M&A, equity/debt offerings, private equity, venture financing and partnership transactions registered in the power sector industry in Q2 2010. The report portrays detailed comparative data on the number of deals and their value in the last five quarters, subdivided by deal types, segments and geographies. Additionally, the report provides information on the top private equity, venture capital, and advisory firms in the power market.

Data presented in this report is derived from GlobalData’s proprietary in-house Power eTrack deals database and primary and secondary research.

Asset Financing Bounced Back with an Increase in Investment By 66% in Q2 2010

Asset financing, including project financing, self funded, tax equity, lease and bond financing, and bridge loans for new builds, acquisitions and the refinancing of assets, bounced back with an increase of 66% in the deal value after a lull in Q1 2010. The market reported $253.5 billion in Q2 2010 compared to $153.2 billion in Q1 2010. Further, the number of deals also increased marginally by 7% to reach 609 deals in Q2 2010, compared to 567 deals in Q1 2010.

In terms of technology, the traditional fossil fuel segment dominated the power industry market, with 144 deals worth $117.1 billion in Q2 2010. The investment was prominently for coal-fired power plants in the quarter. Some of the big ticket deals in Q2 2010 include: the Government of Vietnam’s investment of $4.5 billion in a coal fired power plant in Kazakhmys; KEPCO, Samsung C&T and Samruk-Kazyna’s investment of $4.5 billion in Balkhash coal fired power plant in Kazakhstan; and NTPC’s investment of $4.5 billion in Bamitha coal fired power plant in Madhya Pradesh, India.

Self-funded power projects, which include projects that have been financed through the company’s own balance sheet either through cash or stocks, increased substantially by 146% with $227.2 billion in Q2 2010 compared to $92.5 billion in Q1 2010. The nuclear power segment attracted much of the investments, registering two eye catching deals in Q2 2010. Those of Progress Energy’s investment of $22.5 billion in Levy nuclear power plant in Florida; and the Government of Russia and Government of Turkey’s joint investment of $20 billion in the Akkuyu nuclear power project in Turkey. Further, project financing, which represents deals that have been financed using debt through banks or financial institutions or through government grants, declined from $58.6 billion in Q1 2010 to $24.7 billion in Q2 2010.

M&A Activity Stepped Up in the Power Industry Market in Q2 2010

M&As, which include changes in the ownership and control of companies (GlobalData considers this value as not a new investment into the market), witnessed an increase in deal value by 30% to reach $16.5 billion in Q2 2010 from $12.7 billion in Q1 2010. However, the number of deals decreased marginally from 118 deals in Q1 2010 to 107 deals in Q2 2010.

M&A activity was dominant in the biopower segment with 24 deals in Q2 2010, followed by solar energy with 20 deals. In terms of the total investments, the utilities network sector topped the investment table with $10.9 billion in Q2 2010. The huge increase in the investment was primarily due to the big ticket deal of PPL’s agreement to acquire Louisville Gas & Electric and Kentucky Utilities for $7.6 billion in Q2 2010. In addition, UIL Holdings’ agreement to acquire Southern Connecticut Gas, Connecticut Natural Gas and Berkshire Gas for $1.3 billion; ABB’s agreement to acquire Ventyx for $1 billion; and Petroleo Brasileiro’s announcement that it was to invest $920.8 million in Acucar Guarani were some of the notable M&A deals recorded in Q2 2010.

According to Syed Tauseef Ahmad, Lead Analyst at GlobalData, “A positive feature noted in the March 10 to May 10, quarter is an increase in the deal value and average deal size for the categories $200-$500 Million. Q2, 2010 saw a remarkable increase in deal value over last quarter, however the average deal size saw a marginal improvement. In April 2010, the average deal value was very high due to the big PPL agreement to acquire Louisville Gas & Electric and Kentucky Utilities.”

New Investments in the Power Industry Decelerated in Q2 2010

Investments in the power sector companies, including new investments through equity/debt offerings and financings by private equity/venture capital firms have continued to decelerate since Q3 2009, reporting $43.9 billion in Q2 2010 compared to $53.8 billion in Q1 2010. The fossil fuel sector topped the table of investments, by maintaining its position as a key investment driving force for the power industry market through its contribution of $31.8 billion of investments in Q2 2010, representing 72% of the total invesment of $43.9 billion in Q2 2010. The fossil fuel sector in the Asia Pacific region is still dominating investments in the power industry, particularly by investing in coal fired power plants in China, the country which is the largest consumer of coal worldwide.

GlobalData expects that new investments in the power sector will migrate more towards promising sustainable energy sources primarily due to more stringent government policies over the growing environmental concern to decarbonise the power sector, which will result in more investments in the sustainable energy sources projects such as solar, wind, and nuclear energy. In addition, more consolidation activity is expected to happen in solar and wind sectors, as companies are concentrating on portfolio build up, supply chain effectiveness, and scaling-up of new technologies.

According to Syed Tauseef Ahmad, Lead Analyst at GlobalData, “2010 is set up to be another tough year as financing conditions remain constrained. Signals suggesting a sustainable recovery are staying mixed and, indeed, there remains a significant concern that recovery could stall, inhibiting deals in this sector. However, despite the credit crisis, the situation is not all bad, as is evident from a slew of investments expected in the renewable energy sector. Going forward, funding in energy efficiency and energy storage (mainly batteries) is expected to increase substantially. From the supply side, energy efficiency can be in the form of devices that increase the efficiency of wind turbines or solar panels instead of larger, direct plays in wind and solar technology. The tightening of capital and the move to less capital intensive technologies as well as the shorter lead time for market entry are the major drivers for this trend.”

Decreased Financing Through Debt Offerings, While Equity Offering Financing Increasesd in Q2 2010

Debt offerings, including public and private debt placements by power companies, have seen a further decline in deal flow, by overseeing the weakened public market in the European region due to the Greek credit crisis, coupled with adverse effects taking a toll on other markets as well. The industry reported a decrease of 50% in the number of deals and 39% in deal value, reporting 55 deals worth $25.9 billion in Q2 2010 compared to 109 deals worth $42.2 billion in Q1 2010. On a year on year basis, the global debt offering market declined by 63% when compared to $70.4 billion in Q2 2009. In particular, the European debt offering market was down by almost 45%, reporting only $9 billion in Q2 2010 compared to $16.4 billion in Q1 2010.

Global equity offerings, including initial public offerings, secondary offerings, and private investment in public equities, witnessed a huge increase by 59% in deal value, reporting $15.7 billion in Q2 2010 compared to $9.9 billion in Q1 2010. The companies accumulated the majority of deal value through follow-on/secondary offerings with $10.1 billion, out of the total $15.7 billion in Q2 2010. Further, the number of equity offering deals decreased marginally from 67 deals in Q1 2010 to 57 deals in Q2 2010. The equity offering market was majorly driven by the fossil fuel segment in raising capital, with 10 deals worth $11.1 billion in Q2 2010. National Grid’s announcement of common stock for $4.8 billion was the major deal that caught the headlines in Q2 2010.

According to Syed Tauseef Ahmad, Lead Analyst at GlobalData, “The current fiscal environment is marked by the lack of hedge funds, debt, tax equity, capital for project financing, and later stage financing. The recession has also negatively affected capital-backed liquidity through IPOs (Initial Public Offerings) or M&As. The third quarter of 2008 marked what most in the industry would dub as the beginning of an end, with a move away from investment surges and over investment in certain sectors such as solar towards more targeted, cautious investments. This has been largely due to the substantial drop in the portfolios of public stocks and a decline in private investments made by the partners.”

“Share prices have gone down drastically and the IPO market has been elusive in the past year both in Europe and North America. However, liquidity equity markets improved somewhat in the second quarter as a result of increased government funding to fill the gap in reduced private investments in the next few years and strong investments in the fossil fuel segment.”

Private Equity/Venture Capital Investments Increased in Q2 2010

Private Equity (PE) and Venture Capital (VC) investments in the power industry increased from $1.8 billion in Q1 2010 to $2.3 billion in Q2 2010. However, the number of PE/VC deals decreased from 102 deals in Q1 2010 to 67 deals in Q2 2010. The wind and solar energy market gained attention, by garnering the maximum investments from PE/VC firms with $889.8 million and $887.4 million respectively in Q2 2010. The majority of VC investments were recorded in the growth capital/expansion stage, which accounted for $932.6 million in Q2 2010.

Excluding Riverstone Holdings’ investment of $800 million in Pattern Energy Group in the wind energy segment and a few notable venture financing deals in the solar segment, such as U.S. Bank and WestLB AG’s investment of $215 million in Solar Power Partner, and Morgan Stanley, Alstom SA and Draper Fisher Jurvetson’s investment of $150 million in BrightSource Energy, the industry struggled in terms of the number of capital raising deals and investments by PE/VC firms in Q2 2010.

Intel Capital emerged as the top PE firm by providing finance worth $65.2 million for six power sector companies during Q3 2009 – Q2 2010, while Carbon Trust Investments Limited emerged as the top VC firm by providing financing worth $51.5 million for nine power sector companies during the same period.

According to Syed Tauseef Ahmad, Lead Analyst at GlobalData, “Venture Capital (VC) interest remains healthy in renewable energy technologies as is evident from a slew of investments by private investors such as Good Energies, Draper Fisher, Jurvetson, Kleiner Perkins Caufield & Byers, Khosla Ventures, RockPort Capital Partners, and Quercus Trustcompanies. A likely trend that will prevail until the recession bottoms out is VC’s focusing their funds to support existing portfolio companies and technologies rather than taking the risk to back emerging start-ups. More important than ever before are opportunities for companies along the supply chain of the renewable energy industries, such as the manufacturers and developers of innovative gearboxes for wind turbines and advanced materials for batteries. Opportunities in solar investments are still present, although many firms are waiting for private-market valuations to lower in line with the sharp decline experienced by public solar companies. Investments in these sectors will move towards later stage funding and project financing. Energy efficiency and advanced energy storage will gain a higher share in VC investments in the next few years.”

Investments Surged in Asia Pacific, North America and European Market in Q2 2010

The Asia Pacific region reported an increase of around 50% in investments in the power sector market, with $127.2 billion in Q2 2010 compared to $84.9 billion in Q1 2010. The Chinese market had the most asset financing investments in Q2 2010, reporting $119.9 billion in Q2 2010, as many clean energy projects/capacity addition and new projects are underway. In particular, many nuclear reactor projects are progressing in China and India, which is expected to increase the overall investment in the Asia Pacific power sector market.

Further, North American and European investment trends are rising, reporting $89.8 billion and $72.8 billion of investments respectively in Q2 2010 compared to $61.2 billion and $42.2 billion respectively in Q1 2010. Except for the Greek credit crisis hitting the European public market, the relatively stable financing market is providing power sector companies with more opportunity to garner high investments to drive future growth in promising sustainable energy projects.

According to Syed Tauseef Ahmad, Lead Analyst at GlobalData, “Deal value increased significantly in Q2, 2010 with the growth in investments being led by Asia Pacific. A careful scrutiny of deals will reveal that the companies were increasingly resorting to small value “follow-on” issues. A significant increase in issues below $150 million is observed. Slowly, as the equity markets recover an increase in the deals over $150 million will be observed. It is interesting that though North America witnessed an increase in equity funding the average deal size is lower than Europe”.

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