Illuminating the M&A potential

The promise of the electrification of transport, buildings, heat and datacentres promises to be one of the biggest game-changers for the industry. There has therefore been a sharp increase in the value of energy and power M&A transactions globally, particularly in the renewables market. Deals with a renewable element made up 61% of total deal values in Q1 2019, totalling $12.7bn out of the $20.6bn global total deal values; an increase of $3.7bn compared to Q4 2018. This bucks the trend that we are seeing in other sectors as the overall trend on a macro level, deal values actually saw a decline of 33% between Q4 2018 to Q1 2019.

The increase in renewable energy is a key driver for M&A activity in the sector as with so much change going on across the industry, traditional energy companies cannot stand still. They must make fundamental changes to the services they offer, their business models, and the way in which they configure and operate their grids, if they are to continue to compete commercially. This provides a further driver for M&A as energy companies look to acquire new IP and reinvent their business model.

With this structural growth in electrification, critical industry and infrastructure, such as factories, datacentres and hospitals increasingly require a continuous supply of stable, reliable and uninterrupted power. This is driving M&A in more traditional manufacturing businesses as it results in an increase in demand for high-technology, high-efficiency electric devices to ensure ongoing power and connectivity supplies where power failure cannot be an option.

This trend is demonstrated by DC Advisory’s (DC) recent deal in which DC advised The Carlyle Group on the sale of Marelli Motori to Langley Holdings. Marelli Motori is a leading manufacturer of generators and electric motors and was sold to Langley Holdings, a multi-disciplined engineering conglomerate, providing capital equipment technologies worldwide. Marelli Motori’s products focus on complex applications and higher-value, bespoke solutions, maintaining high reliability across rigorous end markets. These factors made Marelli Motori extremely attractive to a large conglomerate such as Langley Holdings.

Plug in to the competition’s mind-set

The changing market is also enticing to new competitors. Technology providers and digital giants, auto-manufacturers, retailers, aggregators and intermediaries are all seeing the opportunity in the energy market.

These companies are well-positioned to attract new investment, scale-up, and to compete with the electricity value chain, with many already taking the initial steps to join the emerging electrification market through everything from connected devices within the home to large-scale wind farms and solar photovoltaic (PV) projects.

Traditional energy companies could leverage these tech-focussed companies by on-boarding their technology early on. Through M&A, traditional energy companies can look to new technologies and distribution capabilities to integrate more intermittent renewables and support distribution energy resources.

The completion of DC Advisory’s recent deal, in which DC advised Japanese-based Paloma Rheem Manufacturing (Rheem) on its acquisition of Netherlands-based, Intergas, highlights a trend in attractive technology elements fuelling M&A in the sector. Rheem, is one of the largest manufacturers of water heaters and commercial boilers in the world and acquired Intergas to not only to access the European market, but also to on-board their technology. Intergas’ promise of a reliable and efficient energy supply is driven by modern technology, with the use of the IoT connecting the energy supply to the rest of the house and smart boilers driving eco efficiency. Rheem therefore looked to Intergas to improve their business model with the latest technology as well as utilise Intergas’ established European brand to break into new markets.

Recharging the business model

As we see huge changes across the sector hit the traditional energy companies, adapting swiftly will become the key to ensuring longevity. However, when looking to do this quickly to remain in a competitive market, it comes with a hefty price tag. The transition from traditional to tech-heavy energy will be complex and costly for energy companies. New funding needs to be sourced either through disposing of non-core assets, debt raising, increased investment from PEs or restructurings. Additionally, working with regulators to develop frameworks that produce rewards for investors, while ensuring that in an ever competitive market, the consumer continues to have a cost-effective and efficient service delivered.

Wiring up the consumer potential

With increased pressure from governments and consumers alike for renewable power supplies, energy companies can no longer be faceless suppliers.

Instead, companies in the space must invest in strong customer relationships and improved high-tech and easily accessible customers service, while leveraging their direct customer access when expanding their offering in areas such as smart home appliances, solar power and EVs. Again, this challenge is coming from established tech companies looking to the energy sector as a new source of revenue. Acquiring a tech arm to bolster a traditional energy company will ensure existing consumers remain loyal to the brand while attracting new customers who may find their historical provider is falling behind the modern trends.

Conclusion

Like many traditional industries that are under threat, adaptation and flexibility will be key to continued success. Energy companies should:

• Invest in the future
• Tap into new funding options
• Prioritise the customer

Ultimately, businesses must take strategic – sometimes risky – steps to ensure their business will stand the technology test. Consolidation via acquisitions will be key to those unable to achieve organic growth quickly. In the next ten to 20 years, the clean energy roll-out will be in full swing and those who are unable to keep up with the pace will struggle to compete.

Should you have any questions regarding this content, DC Advisory’s global team would be delighted to discuss in more detail >

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