An uptick in deal value and volume in the second half of the year has helped the North American power and utilities sector rebound strategically from the onset of the COVID-19 pandemic. This trend is expected to continue into 2021.
"As we progress into 2021, we expect pandemic related uncertainty to continue to impact the deal market; however, we also expect opportunistic M&A activity to continue as industry participants look to rebalance and rationalize portfolios and deploy capital into attractive growth and yielding investments, such as we saw in the second part of 2020," PwC wrote in its "Power & Utilities deals insights: 2021 outlook."
"Additionally, as seen in [the last 12 months], we expect renewables and [environmental, social and governance] initiatives to continue to drive investment thesis and deal activity in the sector."
The consulting group noted in its midyear report that deal volume in the first two quarters of 2020 fell to 15, or nearly half of the 29 deals reported in the first half of 2019. Total deal value was reduced by about 34% to $13.3 billion in the first half of 2020 from $20.1 billion in the same year-ago period.
"While the first half of 2020 saw sizable reductions in deal value at $13.3 billion, megadeals returned in the second half of the year driving an incremental $31.6 billion in deal value from June 30 through [Nov.] 15," PwC wrote in its Dec. 10 report.
PwC observed an "overall decline in deal volume compared to 2019" with 41 deals through Nov. 15 versus 52 deals in 2019. "However, on a deal value basis, total deal value increased from $42.9 billion in 2019 to $48.1 billion in [the last 12 months]," PwC wrote.
The report pointed out that while the sector saw a 21% decline in deal volume in 2020 compared to 2019, it "experienced a 12% increase in deal value."
Dominion Energy Inc. in July announced the sale of its natural gas transmission and storage business, along with 25% ownership of Cove Point LNG, to Berkshire Hathaway Energy in a deal with an enterprise value of about $9.7 billion. Dominion is moving forward with a dual-phase closing of the sale and completed an $8 billion divestment of the majority of its gas transmission and storage assets in early November.
Dominion plans to increase its focus on regulated utilities and cleaner energy.
In another megadeal, Avangrid Inc. on Oct. 21 announced plans to acquire PNM Resources Inc. in a $4.32 billion cash transaction. The deal is expected to provide the financial strength PNM needs to exit coal and pursue its carbon-free strategy. Both companies pointed to ESG alignment as a factor in their planned merger.
"In today's market, investors and stakeholders are more frequently calling for — and pointing to — ESG as a key factor, viewing social good and profitability as increasingly intertwined," PwC wrote. "Sector participants will continue to evolve ways in which they pursue ESG initiatives, optimize and refine their ESG reporting, and embrace purpose-led strategies."
A third megadeal, which occurred in the first half of the year, involved Brookfield Renewable Partners LP's acquisition of the remaining 38.5% stake in TerraForm Power Inc. that it did not already own. The deal created a pure-play renewables powerhouse with assets totaling about $50 billion.
Brookfield Renewable Partners added about 4,200 MW of TerraForm generation assets to its portfolio of about 19,000 MW of operational and 15,000 MW of under-development assets. Brookfield Renewable is a subsidiary of Canada's Brookfield Asset Management Inc.
"Renewable deals remained a sizable portion of sector deal activity in [the last 12 months of] 2020, with 34% of the total deal value," PwC wrote.