Power Industry Surging

Americans are a demanding group but, when you cut to the chase, we can live with inconveniences. However, lack of power, and the accompanying implications on our life and lifestyles, would not be among those conveniences we could easily do without. Power is integral to all facets of our lives and, as society evolves, demand for power grows. As a result increasing demand for new and cleaner sources of power creates opportunities for investment as companies expand to meet demand or innovate to produce cleaner or more efficient power.

These are a few of the many reasons why the power sector is among the best long-term investment strategies for investors. Corporations and private equity groups understand this and are actively seeking ways to exploit the abundance of investment being funneled into this sector.

Companies focusing on and serving the power sector are acquisition targets due to long-term investment that will be undertaken in this sector. Demand for new generating capacity is expected to grow an average of 1.5 percent per year in the U.S. through the year 2030. This sustained level of growth over an extended period of time will force utilities and other companies that generate power to invest in the expansion of current facilities and build new facilities as well as improve the infrastructure that transmits power to businesses and homes.

Today, there is limited or virtually no interest in new investment in coal burning plants, which has forced power generation companies to invest in more natural gas plants as well as seek out alternative forms of power generation including nuclear, wind, solar, geothermal and others. The current focus is primarily on the renewable power segment and with good reason. Corporations and people are taking a more proactive view towards the emissions that everyday life creates. As a result, there is a strong investment thesis for companies that can create innovative ways to reduce carbon emissions. The government has been quick to support this sector with President Obama requesting $8 billion of new federal government investment in his most recent budget proposal, in addition to the current tax credits, grants and loan guarantees.

While the long-term prospects for renewable energy are good, investment in traditional forms of power remains high since significant resources have been funneled into coal and natural gas power generation facilities. Consequently, M&A activity across this sector is strong with both strategic and financial acquirers remaining very active. In 2010, activity reached its recent peak with both strategic and financial acquirers increasing total acquisitions during that period.

Global Power Related Merger & Acquisition Activity

Source: Capital IQ

Source: Capital IQ

In 2011 and beyond expectations are high for this sector. Government regulation will certainly play a role in determining which segments will succeed but companies boasting broad penetration in this sector will remain attractive targets for potential acquirers seeking to leverage the investment trend. As a result, the M&A market will continue to improve and become increasingly active while creating a competitive landscape that will bolster valuations and terms for sellers.

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Michael Rosendahl

Investment Banking
mrosendahl@pcecompanies.com
New York Office

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