The report on views of survey respondents noted that high valuations were the prime cause of failure in some M&A activity over 2005-7. They added that a number of acquisitions saw the enterprise values per MW valued at US$4M-US$5M - a significant premium, it noted.
However, the respondents cautioned that government targets and regulations were complicating factors in judging appropriate valuations, especially as they were prime drivers pushing the prospects for the renewables market. In addition, development pipelines owned by the target companies were a further complication to establish valuations.
But the hydro sector is not expected to be hit by over-valuation despite the increasing scale of general M&A activity.
There is less interest in hydro – “which has long been profitable but has little growth potential”, notes the report. It added that tidal energy was still a long way from large-scale commercial viability and there was no dominant technology. Dozens of tidal energy technologies are competing for investment, it said.
More than half of survey respondents said they expected no change in the pace of consolidation in the hydro sector to 2010, while just over a quarter anticipated there would be an increase. The proportion expecting no change in tidal consolidation was more than 60% while 14% of respondents thought the pace may increase that sector.
Almost a quarter of respondents said their businesses had been involved in acquiring a business with hydro assets in 2005-7. Just over 20% of respondents expected further hydro acquisition activity to 2010.
‘A notable shift away from hydroelectricity is currently taking place,’ the report says.
Comments received from respondents also noted local environmental concerns over large new dams and reservoirs in Western countries, though there was scope for more small hydro in most areas.
Analysts estimated that there was almost US$56B of total M&A activity in the global energy sector in 2007 – nearly half as much higher than the previous year. Not all deals were large transactions, KPMG noted in the report.
According to the survey results, it was felt that M&A competition was likely to increase further with consolidation activity focused in wind, solar and biofuels, especially with improving technologies supported by pricing structures that aid financial viability.
The report was written by KPMG in co-operation with the Economist Intelligence Unit. It is based on a survey of 202 senior executives, half with boardroom responsibilities, in February this year.
The executives surveyed worked for a range of firm involved in energy from generators and distributors to investors, and involved some major groups. About a third of those surveyed were in North America, almost as many were in Europe and the balance were in Asia-Pacific (22%) and Middle East & Africa (14%).
* ‘Turning up the heat: An insight into M&A in the renewable energy sector in 2008’, by KPMG.
