In the last decade, the utilities industry has behaved more like the tortoise than the hare in the race to consolidate. While companies in sectors such as telecommunications, banking and oil have actively joined forces and reshaped their industries, utilities have followed a conservative route toward mergers and acquisitions (M&A). Recent trends indicate that utilities are no longer idling on the starting line—in the past 18 months alone we have seen a greater growth in the concentration of the top players in the industry than in the preceding 10 years.
Now, the forces for continued fragmentation are being overshadowed. Even the stringent regulatory environment can’t compete with decreased avenues for earnings growth, increasing demands for capital expenditures, declining returns on equity, and other factors that are accelerating the pressure to consolidate.
In the last 10 years, the number of investor-owned electric utility holding companies in the United States has declined from 69 to 51, a trend we expect to accelerate, leading to less than 40 US investor-owned electric utility holding companies by 2020.
Some companies are better positioned than others to drive consolidation—and some need to re-evaluate their strategy based on their positioning if their ambitions are to grow through M&A. So how can utilities industry players better prepare themselves for the race to consolidate?
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Accenture has evaluated the key players according to their readiness to lead consolidation through a successful merger and acquisition strategy, analyzing 50 electric and electric-gas combination utilities. This analysis suggests the industry has now turned the corner on the drive to consolidation—and many companies are surprisingly unprepared.
Accenture’s analysis used nine factors that combined publicly available data and knowledge of the industry to explore how companies are positioned to drive consolidation in the US utilities sector.
The research identified three broad categories of companies with respect to their positioning for M&A activity. Their characteristics are:
Green Flag: Companies that are better positioned to lead the consolidation race are relatively strong financially, are likely to have a growth track record and maintain high-performing operations.
Yellow Flag: Companies that have strength in multiple areas—such as balance sheet, operational performance, acquisition experience, or overall size and scale—while also having several factors that prepare them less well for consolidation, likely will pursue smaller acquisitions or mergers of equals with peers in the same category.
Red Flag: Companies that have strengths in one or two areas, but have multiple factors that make it more difficult to acquire others and more likely that they will be acquired, may continue to operate successfully as independent companies, or will fetch strong premiums when acquired.
Clearly, mergers and acquisitions aren’t easy. Dramatic changes in political, regulatory and economic landscapes are adding further complexities to difficult transactions. But the results can be rewarding. In particular, the potential for operational excellence as an outcome for M&A activity is high. For the acquired, if they’ve embraced operational excellence they’re more likely to command a premium; for the acquirer, drawing operational excellence into the organization through consolidation is a prime path to realizing value.
Indeed, as analysis has shown, wherever utilities companies are ranked in readiness for M&A activity, those achieving high performance are more likely to gain higher synergy outcomes. As such, companies would do well to perform every day as they do on their best day, if they aim to reach the checkered flag in the race to consolidate.