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Engie moves further from its roots with bolt-on M&A strategy

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Engie moves further from its roots with bolt-on M&A strategy

Engie SA has no intentions of slowing down its recent acquisition spree, which has seen the French utility hoover up renewable energy developers and a range of engineering and construction firms, as well as equipment and service providers.

The company is planning to shrink its geographic footprint by exiting around 20 countries over the next three years and wants to speed up asset disposals to finance up to €12 billion of new investments between now and 2021.

As it completes its shift from an upstream energy major to a more nimble renewables generator and one-stop shop for energy services, Engie is not planning for "transformative M&A," CEO Isabelle Kocher said on a July 30 earnings call. Instead, it will keep targeting smaller bolt-on deals that supplement its broadening portfolio.

"We continue to work on ... small- and medium-sized acquisitions," Kocher said. "No transformative M&A in our [pipeline], but really something that is extremely structured and selective."

Over the last few years, Engie has already sold a number of large business units, including its upstream LNG and oil and gas businesses for a combined $7.65 billion in 2017, as well as gigawatts of coal-fired power plants in the U.S., Europe and Asia.

In turn, it has snapped up renewable energy developers, many of them in its home market of France, and has branched out into the a diverse range of energy services — from heating and cooling to electric vehicle charging and energy efficiency.

Although regulated network infrastructure and merchant thermal generation still make up the bulk of its earnings, renewables and services have been gaining ground. And the majority of its planned capital expenditure is earmarked for the client solutions and renewables businesses, at €4 billion to €5 billion and €2.3 billion to €2.8 billion, respectively.

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Acquisitions accelerate

Since 2015, the year GDF Suez rebranded as Engie, the company has announced 59 sales, excluding deals that have been terminated. But over the same period, the utility's buying activity — totaling 109 deals — has accelerated significantly, according to an S&P Global Market Intelligence analysis.

Engie announced only 28 deals in 2015 and 2016 combined, followed by 26 in 2017. Last year, it inked agreements to buy 36 companies or assets, and it has added another 19 so far this year.

Since June alone, Engie has bought Powerlines Group GmbH, a German builder of high-voltage transmission lines for energy providers and railways; Conti LLC, a diverse construction and energy services company active in the U.S. and Canada; and U.K. firm ChargePoint Services Ltd., which builds charging infrastructure for electric vehicles.

Some of those deals are a far cry from Engie's former focus on large power plants and upstream energy production but serve as a sign of things to come, according to Kocher, who name-checked both the Conti and ChargePoint acquisitions on the recent earnings call. As further evidence of Engie's overall diversification, less than a third of the acquisitions it has announced since 2015 are in the utility, independent power producer or renewable energy sectors.

"We target key geographies, typically the U.S., as I mentioned with the recent Conti acquisition, or we target specific technologies," Kocher said. "We recently, for example, acquired a player in the U.K. specialized in [electric vehicles], green mobility, electric vehicle charging stations. So that's typically the kind of target we look at."

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In its announcement of the Conti deal, Engie also highlighted how that company will fit into the utility's broader strategy of catering to large clients looking for a range of services, from green power supply to asset management and energy efficiency upgrades. In the U.S., the utility already counts parts of retailers Target Corp. and Walmart Inc., pharmacy chain Walgreens Boots Alliance Inc. and telecoms giant Verizon Communications Inc. among its services clients.

Engie's executive vice president and CFO, Judith Hartmann, said the company is already in discussions for additional contracts to provide district heating and cooling and public lighting coupled with onsite generation, as in the case of a recently signed $1.17 billion contract to take over energy supply and management for Ohio State University's 485-building campus in Columbus.

There is "a really interesting [pipeline] of a few universities, again in particular in the U.S.," Hartmann said.

With year-on-year growth of 4%, the client solutions segment was the only one of Engie's major business areas to increase its result in the first half of this year. With €438 million in current operating income, it only made up around 14% of the overall group, but Engie expects it to grow by mid- to high single digits this year.

"We are very confident in our client solutions dynamic," Hartmann said, noting revenues have grown 10% in the segment since last year. "Our fundamentals are very solid."

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