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The energy sector began to gain confidence in 2016.

Christian Specht

Partner, Deal Advisory M&A

KPMG in Germany


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Energy and Utilities

Although the number of deals fell in 2016, the value of Energy and Utilities transactions saw a healthy increase to pre-2007 levels, as the sector began to regain confidence. Indeed, 2016 may be seen as the turning point as total deal values hit their highest level for almost a decade.

“Over the past 18 months, as oil prices have decreased, the ability of companies to invest in M&A has been reduced,” says Henry Berling, Managing Director and Head of US Energy Investment Banking for KPMG Corporate Finance, KPMG in the United States. “This had a negative impact on earnings. Similarly, from a power and utilities perspective, the global slowdown in GDP growth has led to low load growth. This, coupled with a glut of gas in key markets like the United States, kept power pricing down, meaning earnings and top-line growth were low.”

Berling notes that companies were largely in ‘survival mode’ in 2015, looking internally to find savings and drive earnings growth. “But now that the worst seems to be behind us in terms of the global picture, they are looking externally for inorganic growth opportunities.”

The data seems to support this view. Deal values in the sector rose to US$753.4 billion, up from US$619.3 billion in 2015 and led by several major transactions out of the United States, which accounted for 5 of the top 10 deals.

“The United States has several big energy and power companies with large sums of capital that needed to find homes. The size of these companies tends to mean that their M&A transactions tend to be big, too,” says Berling.

The renewables market also continues to be attractive, he adds, with favorable tax legislation and subsidies that are helping to drive the development of renewables, relative to conventional energy. Wind and solar development, for example, has outpaced conventional assets.

“We expect to see a new wave of transactions in 2017 as part of a trend towards market rationalization. This will likely include a focus on infrastructure and transportation-type assets, which are seen as ‘safe havens’ at times of volatility,” says Berling.

This view is supported by data from the M&A Predictor, which forecasts forward P/E ratios, our measure of appetite, to increase by 16 percent for corporates in the Energy sector and 6 percent in the Utilities sector, up to December 2017. Energy corporates’ capacity to transact, as measured by net debt/EBITDA, is predicted to improve by 23 percent over the same period, while capacity in the Utility sector is expected to decline marginally.

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Chemicals and Basic Materials

2016 was quite a notable year in the Chemicals and Basic Materials sectors, with total deals reaching their highest value for 10 years. This included several blockbuster Chemicals deals exceeding US$40 billion, the most notable of which was the US$66.3 billion Bayer-Monsanto deal, following on from 2015’s headline-grabbing Dow and DuPont merger.

“The Bayer-Monsanto deal is a good example of the kind of transformational transactions we’ve seen in the Chemicals sector recently. It shows there is a huge appetite for large transactions. Strong earnings over the last 3 years and favorable funding means that a lot of companies have large war chests to invest. And with debt funding still cheap, there is strong appetite for M&A,” says Christian Specht, partner at KPMG in Germany.

Another example of the transformational deals driving M&A activity is the pending US$3.2 billion acquisition of surface treatment provider Chemetall by BASF.

“These deals are signs of the ongoing portfolio shift we are seeing in the market,” says Specht. Companies previously were looking for the ‘perfect 10,’ he adds. “Now, they are realizing that is unrealistic, so they are happy to go with an 80 or 90 percent fit instead. This is having an impact on overall levels of M&A activity, as those acquisitions are then trimmed to better fit the portfolio and non-core activities are sold off.”

The M&A prospects for the overall Basic Materials sector, which includes Chemicals, is expected to remain at a similar level next year. The M&A Predictor forecasts an increase of 3 percent in appetite for transactions, as indicated by forward P/E ratios. However, the capacity of companies to transact, measured by net debt/EBITDA, is predicted to rise by 18 percent.

Global M&A predictor for energy
Global M&A predictor for basic materials
Global M&A predictor for utilities

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