According to the report, the UK “continues to be the centre of M&A activity in Western Europe” attracting a number of buyers including Canada investors Aquila Group that acquired a minority stake in Thames Water and US-based private equity firm KKR, which acquired South Staffordshire Water.
The report stated that during 2013 there were five deals in the UK water sector worth a total £430 million.
UK water company share prices have risen by an average of 15 per cent this year, according to Ernst & Young, but there is a “risk that the high valuations, levels of dividend and other distributions will trigger a regulatory response” from Ofwat.
The report noted that the UK energy regulator Ofgem had proposed increasing competition in the UK electricity market to provide a more competitive environment for independent suppliers to buy and sell power.
Globally while volumes remained flat in the utilities merger and acquisitions sector (M&A) a handful of what EY called “mega deals” during the second quarter of 2013 in the global power and utilities sector sparked a 30 per cent rise in M&A value to $33 billion (£22 billion), up from $25.3 billion (£16.5 billion) in the first quarter of 2013.
While volume remains flat, an absence of large European divestments meant there was a 46% decline in deal value in the second quarter of the year from the first quarter of 2013. However, EY said that “large transmission and distribution deals are anticipated later this year and so a bounce back is expected”.
Asia-Pacific M&A value rose 71 per cent in the second quarter of 2013 in comparison with the first quarter of 2013, with Chinese inbound M&A activity contributing 81 per cent to the region’s deal value. Restrictions on ownerships of power assets in Japan and low domestic profit margins in China means this is likely to increase further in the coming months as utilities are pushed to explore foreign acquisitions.
Joseph Rodriquez, EY global power and utilities sector senior manager, said: “The outlook for global M&A activity in the sector is positive, with big deals in the pipeline for Greece, Finland, New Zealand and Africa, as well as robust activity in the US and Western Europe, potentially generating a number of billion-dollar-plus deals in the pipeline for 2013.
“Financial buyers are also expected to return, with new hubs of financial investment emerging in areas such as Japan and the Middle East providing a potentially interesting second half to the year.”