Companies increasingly focused on cost reduction
TORONTO, May 15, 2014 /CNW/ - In Canada and around the globe, power and utilities (P&U) companies are showing a strong desire to do deals in the next year, according to a recent EY survey. But, they're still dealing with uncertainty when it comes to pricing those deals.
"We've already seen a strong start to the year with global deal values the highest they've been in the sector in three years," says Gerard McInnis, partner in EY's Power & Utilities practice. "In Canada, we're seeing deals driven largely by US entities looking for opportunity outside their own service territories."
According to EY's latest Power & Utilities Capital Confidence Barometer, global deal volumes are likely to continue this upward trend. Sixty-nine percent of survey respondents expect deal volumes to improve, and another 33% plan to pursue an acquisition in the next 12 months.
Meanwhile, the report notes that amid moderating load growth demand, greater energy conservation and efficiency, and increasingly distributed generation, US utilities in particular are looking beyond their service territories for growth.
"High demand and competition for Canadian assets – from the US and other foreign entities – is driving up the rate base and resulting in assets being sold at a healthy premium," explains McInnis.
But despite continued regulatory and market uncertainty, evidence suggests the valuation gap is shrinking as the deal making environment gets busier, he adds.
Transactions aren't the only growth strategy Canadian power and utilities companies are undertaking, either. Thirty-eight percent of executives cite cost reduction as a primary area of focus.
"Increased regulatory oversight and heightened stress on earnings have prompted utilities to optimize their operations and rebalance their portfolios," says McInnis. "And with M&A a major component of utilities' growth agenda over the next year, keeping costs under control can also serve companies well if they decide to take advantage of increased appetite for deals."
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SOURCE: EY (Ernst & Young)