Take Control of Your Future, Part V: Delivering Shareholder Value through M&A

In my first blog in this series, I discussed seven megatrends that are fundamentally changing how we produce and use power. As discussed widely across the industry, the pace of transformational change in the utilities industry is accelerating. Low demand growth, increased carbon reduction policies and regulations, changing customer demands, the growth of distributed energy resources (DER), and other developments are shifting the value proposition for incumbent and new players alike.

It is no surprise that with so much change, mergers and acquisitions (M&A) are on the rise, with fascinating implications for the broader industry. We hear mostly about large acquisitions—Exelon's acquisition of Pepco, Emera’s acquisition of TECO, Southern Company acquiring AGL Resources, and Duke Energy acquiring Piedmont Natural Gas Co, Inc.—but there is much more happening under the surface and on the periphery, underscoring the tectonic shifts reshaping the energy industry.

With the emergence of the Energy Cloud, which is driving broad and pervasive digitalization of the industry, utilities, manufacturers, technology companies, and other stakeholders are pursuing proactive initiatives such as M&A deals to retain customers, increase revenue, and improve market position. Recent activity points to three different flavors of M&A deals occurring with more frequency than others:

1. Utilities acquiring other utility companies or assets
2. Utilities acquiring energy technology companies
3. Manufacturers or energy technology companies acquiring other manufacturers and energy technology companies

 Utilities Acquiring Other Utility Companies or Assets

The table below shows that the value of utility deals has more than quadrupled in 2014 and 2015 compared to 2012. In the first quarter of 2016 alone, 22 deals valued at more than $40 billion have already closed.

Utility M&A Deals (>USD $5M): 2012-2016 (Q1)

(Sources: S&P Capital IQ, Thomas Reuters)

The main driver for this increased level of M&A activity is a renewed search for growth, shareholder value, and diversification to offset some of the challenges facing the industry. Additionally, utilities are increasingly hedging against uncertainty and risk, as seen with Duke Energy and Southern Company acquiring natural gas companies as they pivot away from coal. As Southern Company stated after the acquisition was announced, “The addition of AGL Resources' network of natural gas assets and businesses will provide a broader, more robust platform for long-term success and increase opportunities to invest in future infrastructure and energy solutions.”

Some utility analysts see these high-cost, high-debt acquisitions as unsustainable. Although the acquisitions are in regulated, low-risk businesses, utilities have had to pay a premium for these acquisitions and utilize debt financing, which could potentially put pressure on their credit ratings.

Utilities Buying Energy Technology Companies

We have seen an even greater uptick in the acquisition of technology companies by utilities. In particular, acquisitions targeting renewables, storage, and DER are on the rise.

A couple noteworthy transactions include Engie (formerly GDF Suez) taking a majority stake in Green Charge Networks, a provider of C&I energy storage solutions, and Southern Company acquiring PowerSecure. According to a press release, PowerSecure, a provider of distributed energy, utility infrastructure, and efficiency solutions, gives Southern Company the capability to help meet commercial & industrial (C&I) customers’ energy needs in the areas of individual reliability, energy efficiency, and green objectives.

Additionally, many utilities are acquiring and investing in companies offering IT/OT and data analytics solutions. The latest example is a $20 million investment in AutoGrid Systems from Energy Impact Partners (EIP), a utility group that includes Southern Company, Xcel Energy, Oncor, and National Grid, and Envision Ventures. According to Michael Donnelly of EIP, “Big data analytics and automated control of grid operations will allow utilities to adapt to the increasingly complex distributed energy environment.”

The rationale behind this wave of energy technology acquisitions by utilities reflects their willingness to play both offense and defense as the Energy Cloud takes shape. It also shows a willingness to protect their core business against new entrants looking to provide new products and services to their customers. At the same time, it suggests a willingness to look beyond their current customer base and target customers with a full suite of energy management solutions within the country and internationally.

In a recent announcement, Ted Craver, chairman and CEO of Edison International stated that, “[within] the New Energy Future … large energy users increasingly need a strategic partner to help them navigate through the diverse energy marketplace. Edison Energy will provide the expertise that will enable large commercial and industrial energy users to explore the many options available to them and to select the best portfolio of alternatives to power their operations.”

Duke Energy’s recent acquisition of Phoenix, a provider of energy management systems and services for commercial customers, offers a similar view. In the announcement press release, Greg Wolf, president of Duke Energy’s Commercial Portfolio, stated: “Duke Energy will continue to expand its offering of on-site, advanced energy solutions for commercial customers as the company finds opportunities in this rapidly growing market.”

These are just a couple of examples, and we expect similar acquisitions to accelerate going forward.

Manufacturers or Energy Technology Companies Acquiring Other Manufacturers and Energy Technology Companies

Of the three categories described in this post, this is perhaps the most active. We have seen solar companies buying other solar companies, solar companies buying storage companies, and technology companies buying other technology companies—the list goes on. From Google buying Nest to Oracle buying Opower and many more, everybody wants to get into the game and is looking for unique, differentiating technologies and capabilities to stay ahead of the competition with a focus on technology synergies and customers.

Additionally, there’s a significant rise in the number of new companies entering the energy space, selling new and innovative energy technology products and services. We don’t expect this trend to slow anytime soon. On the contrary, with the scale of investment pouring into newer, greener ways of producing, managing, and using power, we are at the beginning of a greentech tsunami.

So What Does This All Mean?

My advice to all these players: Be alert and think out of the box. Your clients today can become your competitors tomorrow—consider IKEA as one example. Technology companies have the potential to become network orchestrators and provide utility products and services. The risk for utilities is they end up with stranded, worthless assets.

Balancing today’s business with tomorrow’s opportunities is key. Thinking through strategy and future-case scenarios will help you understand the opportunities and threats as technology and customer choice drive new products, services, and business models. Stay close to your customers and innovate; partner where it makes sense and stay in the game. This is Energy Strategy 2.0 for the Energy Cloud 2.0.

This is the fifth in a series of posts in which I discuss each of the power industry megatrends and the impacts (“so what?”) in more detail. My next blog will cover the regionalization of energy. Stay tuned.

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