US utility M&As remain resilient in first half | White & Case srl
Tailwinds such as the global transition to clean energy sources and the need to rebuild infrastructure are driving transactions in the sector
The US utility bargaining scene seems to be coming back to life. After two years of below-average activity amid the pandemic, there are positive signs of a recovery in business activity. There were 24 deals in the sector in the first half, already a 20% year-over-year increase.
M&A activity in value 2019 – 2022 [YTD]
Target location: UNITED STATES Place of the bidder: Global Sectors: Utilities (other)
Meanwhile, the overall deal value was US$10 billion in the first six months of the year, an 8% increase from the first half of 2021. This deal total, however , was primarily due to a large transaction, the US$7.6 billion acquisition of South Jersey Industries. .
This robust activity bucks the global M&A trend, with overall declining deal volumes and values amid rising interest rates and challenging funding conditions.
Investors eye natural gas utilities
The energy transition is a major bargaining driver in the US utilities sector. The year’s highest-value deal was the US$7.6 billion acquisition of SJI, owner of four of New Jersey’s four gas utilities, by the Infrastructure Investments Fund, part of JP Morgan Investment Management.
The deal marks the first time a New Jersey utility company has gone private, underscoring the current appeal of utility assets due to their stable and reliable revenues.
A key motivation for the agreement is to enable SJI to fulfill its commitment to achieve carbon neutral operations by 2040. According to the IIF, SJI’s track record of investing in carbon neutral initiatives clean energy have given the company a clear competitive advantage within the industry.
Also announced in February, Ulico Infrastructure Fund (UIF) acquired regulated gas distribution company Hope Gas from Dominion Energy for $690 million. According to the UIF, adding the established large-scale utility to its portfolio offers opportunities for further geographic diversification.
Power companies are repositioning themselves for growth
Mergers and acquisitions also remain a crucial tool for utility companies to strategically reposition themselves in the market, especially as they grapple with the shift to decarbonization. In March last year, PPL acquired The Narragansett Electric Company from UK utility company National Grid for US$5.2 billion. The move, which reflects PPL’s ambition to become a purely US-focused energy company, was announced the same month as the sale of UK utility company Western Power Distribution (WPD) to National Grid, valued at $10.4 billion.
It is perhaps unsurprising that achieving decarbonization goals was a key driver for its acquisition of Narragansett Electric Company. At the time of the announcement, PPL referenced its experience automating power grids as key to achieving Rhode Island’s goal of producing 100% renewable energy by 2030.
Investments abroad are accelerating
Foreign investors are increasingly looking to US utility companies for long-term growth. Last December, the UAE’s sovereign wealth fund Abu Dhabi Investment Authority (ADIA) acquired a 10% stake in Sempra Infrastructure for $1.7 billion. A key motivation for ADIA’s investment, which ended in June this year, was the energy infrastructure company’s role in modernizing energy networks and facilitating the energy transition.
Sempra Infrastructure is an energy infrastructure company developing several projects in North America, including liquefied natural gas (LNG) export projects, renewable energy and carbon capture initiatives. It was formed in 2021 by the combination of Sempra LNG and Mexican energy investor IEnova. Prior to ADIA’s investment, KKR previously acquired a 20% stake in the energy platform for $3.4 billion in April.
Interest in water services generates agreements
The fragmented nature of the water services space, the potential for sustainability and the regulated nature of investments are of interest to negotiators. In July this year, it was announced that US renewable energy company NextEra, through an indirect subsidiary NextEra Water, had completed the acquisition of a portfolio of 23 water and of five wastewater treatment systems located near Houston, Texas. The deal was announced last October.
The acquisition is the renewable energy company’s first step into water utilities as it seeks to become a market leader in the space over the next few years.
Current pressure on US utilities to play a role in the energy transition will continue to drive them to seek long-term investment partners. Institutional investors and private equity firms, meanwhile, are increasingly being held accountable for how they deploy their capital. The US utility space presents many investment opportunities.
The long-term investment horizons and stable returns offered by utility investments provide additional incentive for transactions, with recent valuations of high-quality assets proving strong. IIF’s acquisition of South Jersey Industries, for example, represented a 46.3% premium to SJI’s average stock price according to analyst reports.
Aging infrastructure within the US utility space is another reason to expect increased investment in the sector in the coming years. The American Society of Civil Engineers recently rated America’s infrastructure at C-minus, the result of decades of underinvestment. The need to upgrade tired infrastructure will be another incentive for transactions.
With these driving forces prompting mergers and acquisitions, there is every reason to expect the momentum that has been building over the past six months to continue to grow.