M&A International Inc. Alternative Energy M&A - Western Reserve ...

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2 Alternative Energy M&A Executive Summary World energy markets are in the midst of a paradigm shift away from heavy dependence on hydrocarbons in favor of a diversified portfolio of energy sources where renewable energy, which accounted for 4.4% of global energy production in 2008, will have a major role. This share will increase rapidly in the next few years, driven by a shift in market focus by both the private and public sectors. For instance, in 2009 power generation investment in alternative energy exceeded investments in traditional fossil-fuel powered generation for the second consecutive year. Moreover, government-backed initiatives have also increased with $180bn mandated in renewable energy related programs in the period 2008–2009. To benefit from the growing importance of renewable energy, industry players have actively increased their renewable portfolios using M&A to buy capacity and integrate horizontally and vertically. M&A activity at record high Rapid expansion and increasing investments have been the catalysts behind a high level of M&A activity in the sector. Since 2007, M&A in the renewable energy space has grown significantly (at a CAGR of 19%) led mainly by utilities and pure-play companies trying to increase their presence in renewable power generation. Pure-play companies have emerged as the leading deal makers, accounting for 40% of the M&A deal volume between 2007 and 2009. Wind energy has been the most active sector, accounting for the majority of both deal volume (66%) and deal value (77%). Regionally, Europe has been the most active, accounting for 64% of target companies and 80% of total deal value. During the credit crisis, valuations fell as a result of the market sell-off. Despite this, deal volumes continued to grow throughout the crisis. While we believe that the growth in M&A since 2008 has been highly strategic, attractive valuations have contributed to deal flow. In addition, M&A, joint ventures and strategic alliances between renewable power generators and their supply chain partners have increased due to rapid growth in new projects, which in turn has required a more integrated relationship between the two. M&A drivers Increased M&A activity has been driven by the actions of three key company types seeking to capitalize on the market’s focus on renewables: (i) Pure-play alternative energy companies (2007– 2009: 40% of deal volume) attempting to access June 2010 parts suppliers to scale the value chain and augment their operational asset base. Increasingly, these market participants are also acquiring other operational companies to expand activities and benefit from economies of scale. (ii) Power utilities (2007–2009: 26% of deal volume, the largest share by deal value) increasing their alternative energy exposure to meet governmentmandated targets prescribing the source of power generation. Some larger utility companies are pursuing backward integration by acquiring globallyactive companies engaged in developing and manufacturing alternative energy assets. (iii) Acquisitions by institutional investors or private equity funds (2007–2009: 18% of deal volume) are increasing as firms seek to diversify their holdings and invest in more sustainable businesses. 18% Figure 1: M&A deal volume by deal type* 16% 40% Pure Play Utility Finance/PE Other 26% Source: Copal Analysis, Capital IQ * Based on top 50 deals by deal value for each year (2007–2009) Future M&A prospects We expect future M&A activity within the sector to be largely policy driven. While large traditional power generators will need to expand their renewables footprint in order to meet their emission-reduction targets, pure-play generators see an opportunity to build sustainable businesses with government support via subsidies and incentives. Highlighting this trend, more countries have either mandated or expanded their renewable energy targets recently. For example, under the American Recovery and Reinvestment Act of 2009, the US government has greatly expanded grants, R&D and rebates focused on renewable technologies, and has also sanctioned programs with a total value of $10bn. The geographical expansion of the European Union (EU) and its push for renewal energy will further increase demand for renewables, as countries take steps to comply with EU regulations and create a common market with standardized investment and power generation norms. This development should provide an opportunity for companies to establish a single market presence throughout Europe. M&A International Inc. – the world's leading M&A alliance
3 Alternative Energy M&A With Asian demand for energy growing rapidly, greater interest in these markets should increase overall deal volume. China and India are seeking to follow the example set by Brazil and reduce their reliance on imported energy by diversifying their asset bases to incorporate more renewables. “We believe M&A activity will accelerate across the value chain, from manufacturing to service to maintenance, and will create sustainable alternative energy companies that thrive with much reduced government support.” Growth in Alternative Energy The outlook for alternative energy is very positive, with the sector generally continuing to expand despite the global economic crisis. Investments in renewable energy generation projects rose 13% in 2008 to $117bn while new private investment in companies developing new technologies has increased by 37% since 2007 to $13.5bn. Furthermore, 2008 marked the first time that power generation investment in renewables exceeded investment in fossil-fueled generation. Growth drivers Regulatory pressure has been the main driver for the alternative energy sector, although more recently incentives have become increasingly important. The four key growth drivers are as follows: (i) Regulatory pressure: “push” policy Several countries have introduced specific targets concerning the share of future energy supplies that must be derived from alternative energy sources. For example, the EU has set a corresponding target of 20% by 2020, which will require major changes to current practice as the region currently meets only 7% of its energy requirements from renewable sources. Some industry observers believe that in order to achieve such a target on schedule, a further $2tn in investments will be required over the next decade. In practice, this implies the construction of over one million windmills or the installation of sufficient solar panels to cover an area twice the size of Belgium. This regulatory policy is being implemented through the use of Renewable Portfolio Standards (RPS or TCS, as part of the Tradable Certificate System operating within the EU), a mechanism requiring electricity chain stakeholders to purchase a percentage of electricity from renewable energy resources. This, in turn, encourages significant June 2010 alternative energy capacity additions by both utility and non-utility companies. For example, in the US the current RPS is 15% of the total energy supply by 2015, a target likely to be revised to 25% once the current objective is achieved. This implies that almost 70% of additional generating capacity in the US will come from alternative sources. This trend is global, with at least 44 countries having similar RPS policies. (ii) Incentives: “pull” policy While mandating the adoption of alternative energy by regulation, governments have also simultaneously introduced various incentives to encourage investment. For example, capital subsidies usually account for 30–50% of installed costs, significantly reducing initial investments required by an investor to establish an alternative energy plant. In one form or another, direct capital investment subsidies, grants and rebates are offered in at least 35 countries. Several states have also set aside special renewable energy funds to be used to directly finance investments and provide low-interest loans for projects. In addition, tax incentives and credits reduce expenses once a plant becomes operational. Another popular and highly successful incentive to boost investment in the sector is the use of feed-in tariffs which guarantee alternative energy producers a long-term off-take agreement at a pre-determined price. Such agreements significantly reduce investment risks involving the alternative energy sector. Approximately 45 countries worldwide operate feed-in tariffs to promote renewable power generation. (iii) Evolving economics Marginal cost inflation in the oil & gas industry will remain a major catalyst for the adoption of alternative energy resources. As marginal costs and, consequently, end-user prices rise, the use of renewable sources becomes more economically attractive. Given the steady decline in hydrocarbon reserves and increasing production, it is apparent that world energy demand is growing at a rate that requires alternatives, such as wind, solar, biomass, fuel cells, etc. to be extensively included in the fuel mix in the coming decade. (iv) Technological advancements Technological advances will play a key role in determining the renewable energy sector’s development, particularly the extent of government development incentives and the degree to which M&A International Inc. – the world's leading M&A alliance
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