Renewables M&A hits the acceleration pedal

INDIA: According to Green Power: 2011, KPMG’s annual survey of global renewable energy mergers and acquisitions (M&A), which aims to (RC) highlight the hot spots and drivers of deal activity around the globe, 2010 was an active year for renewable energy M&A, with a total of 446 deals completed in the period, representing an increase of over 70 percent on the 260 deals closed in 2009.

M&A activity levels are showing no signs of cooling off in 2011, as a record 141 renewable M&A deals totalling US$11.2bn were announced in the first quarter of the year, representing more than double the average quarterly value of $5.5 billion in 2010, over an average of 96 announced deals.

Richard Rekhy, Head of Advisory, KPMG in India said: “The global renewable M&A market has had a busy start to 2011, with a substantial jump in global activity which looks set to continue. In particular, our survey has shown that deals in the US$50m - $0.5 billion bracket are likely to see the greatest increase whilst, overall, higher competition for targets is expected to push up global valuations driven by better financing conditions, a post-Fukushima reinvigoration of sentiment and soaring oil prices as well as some new acquirers, including Asian manufacturers and potentially pension funds.”

Biomass and Solar are going to attract majority of M&A traffic globally within the renewable space. In Indian context, we see increasing trends towards sustained M&A activity in the renewable space, specifically wind, small hydro, and solar sub-segments going forward. With clear thurst on this space, and a supportive policy and regulatory environment, we see this activity picking up slowly but steadily. The deal sizes, however, may be smaller (as compared to global benchmarks) to start with.

However, government incentives remain as important as ever to the sector, particularly in Western Europe. The survey showed that more respondents planning to invest in the major Western European renewable markets cited incentives as the primary motivation over any other factor.

Richard Rekhy continued: “Our survey confirms the importance of incentive regimes to investors in Western Europe. The acceleration of cuts to feed-in tariffs for new projects across Western Europe over the last year is driving growing competition for existing projects with attractive guaranteed feed-in tariffs at higher historic levels and providing a temporary boost to deal activity and acquisition multiples in Europe. As already evident in the UK, without further stimulus the level of M&A activity, in solar photovoltaic assets in particular, can be expected to significantly decline once operational projects with attractive feed-in tariffs have long term owners.”

Furthermore, 78 percent of respondents expected the global renewable energy market to be driven by new investors from China, while 59 percent expected new acquirers from North America to develop the market.

Unfortunately for Europe, a heavy bias towards local investment was also revealed, with more than double the number of Asian respondents intending to invest in China and India than those intending to invest in European countries. The survey showed a similar approach from North American investors, who prefer to invest domestically over China, India, Germany and the UK by a ratio of at least 2:1.

Richard Rekhy added: “At a time when debt-laden European countries are facing government stimulus being reined back or curtailed, these findings confirm that European countries will not be able to rely on trans-continental investment to plug their domestic renewable energy funding gaps without additional steps such as EMR in the UK. Providing clarity, credibility and a stable Government policy in the near term will be essential.”

Key findings:
* In 2010, a total of 446 renewable energy deals were completed, representing an increase of more than 70 percent on the 260 deals closed in 2009.
* A record 141 M&A deals were announced in the first quarter of 2011, with a total value of US$11.2bn; more than double the quarterly average value in 2010 of $5.5 billion on an average of 96 deals.
* The top five targeted countries for renewable energy investment are the USA, selected by 53 percent of the respondents, China (38 percent), India (35 percent), Germany (34 percent), and the UK (33 percent). The main mover is China, which this year moved from fifth to second position.
* Biomass was found to be the most compelling renewable energy sector again, with over 45 percent of respondents intending to invest (2010: 37 percent); closely followed by solar at 39 percent (2010: 37 percent), while onshore wind lost ground at 30 percent (2010: 35 percent) and appetite remained limited, but broadly stable for offshore wind at 10 percent (2010: 11 percent).
* Over 70 percent of North American, Asian and European respondents predict increased competition for acquisition targets.
* Globally, over 40 percent of corporate and investor respondents intend to pay 3-5x EBITDA for renewable energy companies over the next 18 months, compared with last year when most respondents intended to acquire assets at or below 3x EBITDA (39 percent).