Analysts: Utility M&A activity to pick up next year

Merger and acquisition activity among utilities will pick up even faster next year as utilities capture the benefits from their increased stock currency, lower costs and gains in size. The once regulated utility industry is moving more quickly into mergers and acquisitions than in decades, says a recent analysis by PricewaterhouseCoopers. 'Look for a continuation and expansion of the trends started last year,' says Doug Meier, partner in transaction services for PricewaterhouseCoopers, Chicago.

Merger and acquisition activity among utilities will pick up even faster next year as utilities capture the benefits from increased stock currency, lower costs, and gains in size.

The once regulated utility industry is moving more quickly into mergers and acquisitions than in decades, says a recent analysis by PricewaterhouseCoopers.

�Look for a continuation and expansion of the trends started last year,� says Doug Meier, partner in transaction services for PricewaterhouseCoopers, Chicago. �The M&A pyramid is expanding out and up.�

The pace will quicken because of the appreciation in value of the common shares, compared to this time last year and that gives companies the wherewithal to buy other companies or assets.

Some utilities will be selling off their generation assets in order to realize their full value and other utilities or independent power companies will be buying the plants as the restructuring takes place in the industry.

�The parts are worth more separately than the sum,� says Meier. �So they will be reevaluating their portfolios of assets and looking to maximize that value. They may realize that some assets will be worth more to the company if they sell them.�

Even in the states with little deregulation, merger and acquisition activity will pick up among utilities trying to drive down costs in anticipation of deregulation.

�Aggressive utilities will move before deregulation,� says Meier.

These companies are merging with others in the effort to get more scale and lower fixed costs in order to become the low-cost provider in the region. Of course, regulated utilities that pursue mergers must share some of the gains with ratepayers. But, despite that shareholders will still experience benefits, he says.

Meier also said more UK and European utilities will continue expanding into the US with acquisitions. Likewise, he expects US utilities and independent power companies to continue to invest in utilities abroad.

The PriceWaterhouseCoopers group point to the following factors contributing to merger and acquisition activity:

� Utilities remain undervalued relative to the S&P 500. Value-unlocking opportunities remain for acquirers.

� Independent power companies will arbitrage their high stock currency and credit ratings to acquire generating assets from traditional utilities.

� Deregulation will continue to drive utility industry consolidation as �super regionals� emerge to survive independently.

� More emphasis will be placed on serving the business customer so companies that can�t accommodate the needs of commercial and industrial customers will find themselves vulnerable to takeover by those who can.

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