Privatisation plans in the Middle East, specifically in Saudi Arabia, in power and water sectors could offer huge merger and acquisition opportunities for international investors over the coming years, an industry expert said.

“Middle East utility companies have yet to realize the upsides from global mergers and acquisitions, especially in Europe which is currently at the forefront of global energy transition and definition of future business models for the industry,” added Kurt Oswald, lead partner A T Kearney Middle East Utilities Practice.

He was commenting on the global management consultancy’s new report titled Mergers and Acquisitions in Utilities 2017.

Last year was a record year for M&A in the utilities sector globally, with total deal value reaching €329 billion ($354 billion), says the report, adding that this trend is expected to continue in 2017, as investors take on an active role to remodel the industry.

This reshaping is especially pronounced in Europe, where financial investors are driving deal activity and breaking up the energy value chain. In contrast, as market capitalizations of utility companies in the Americas rebound, it is spurring a wave of mergers and consolidations. Asian companies are increasingly active in cross-border M&A.

Financial investors’ entries and low market capitalizations for utility companies in Europe have challenged the traditional integrated model. Utility companies are being split up and low-performing assets across energy generation, transmission, and distribution are being divested. E.ON and RWE are examples of how spinoffs are taking place and how leading players are breaking up the integrated utility business model.

“In a financial market characterized by cheap money and uncertainty, utilities companies are considered an interesting investment opportunity. We have identified seven robust deal rationales for utilities in the year ahead,” said Andreas Stender, A T Kearney principal and a co-author of the study.

“Financial investors are increasingly looking to the. “Investors and utilities companies alike need to make tough choices and develop new business models leveraging M&A to drive value in an energy market that is under increasing regulatory and competitive pressure.”

Worldwide deal activity around renewables was a major driver. Investors continue to increase their renewable assets’ value through mergers and acquisitions that bring greater economies of scale and operational excellence. M&A transactions in renewables increased 60 per cent from 2010 to 2015, according to the United Nations Environmental Program.

However, a potential renewed focus on traditional energy infrastructure inspired by US President Donald Trump’s energy plan could further strengthen the market values of incumbent utilities and infrastructure players in North America. This will increase incentives to drive synergies through consolidation as shown in the 2016 mega-mergers.

“As utilities across the globe reshape themselves for the future, they will also need strong partnerships, joint ventures, and investments to develop innovative new business models,” Stender said. “This, coupled with the transition to new energy sources, will boost M&A.” – TradeArabia News Service