Brexit blows cold breeze over near-term power and utilities deal activity - Analysis (MergerMArket.com)
* Current processes likely to be cancelled or delayed
* Brexit facilitates EDF withdrawal from Hinkley
* Cheaper sterling creates attractive entry points for investors
The UK's vote to leave the EU creates a bleak outlook for M&A and investment in the power and utilities sectors, while renewables will see little immediate effect , according to sector advisers and executives.
In the short term, power and utilities processes in the UK will be delayed or cancelled, several dealmakers said.
Bank and debt capital funding for deals has got a lot more expensive, a sector lawyer and the head of EMEA power and utilities at a US-bulge bracket bank said.
National Grid [LON:NG] is set to launch the sale process for a majority stake in its gas networks this summer. SEE [LON:SSE] is looking to sell its stake in gas network SGN, while Mitsui & Co [TYO:8031] is looking to unload its 25% interest in a UK power generation joint venture with Engie [EPA:ENG].
Macquarie [ASX:MQG] is looking to sell its 26.3% stake in the country’s largest water utility, Thames Water, however the initial bids for this were submitted today despite Brexit uncertainty, Mergermarket's sister publication InfraNews reported earlier today.
All of these processes have primarily attracted the interest of foreign investors, mainly Australian, Canadian and Chinese, as reported by this news service.
In the short term, most of these processes will be pausing, the banker said. Though, because it is almost summer, this can be dressed up as the normal holiday hiatus and things will shift into September, he added. Frankly, what happens then is crystal ball gazing, he added.
The other short term risk is of course what will happen to the EDF [EPA:EDF] led GBP 18bn Hinkley Point C project, he added. Almost certainly EDF will withdraw as it is now politically easier for it to do so, and politically necessary, a second sector lawyer said. EDF is set to meet with France’s Works Council on 4 July to discuss the project with union representatives, according to a company statement.
Initial planning for the 3,900 MW Hinckley Point began in 2009 and was initially set to become operational in 2023, but delays involving financing the project have pushed the opening of the project to 2025, according to EDF’s website. EDF did not respond immediately to requests for comment.
The EU referendum vote added to an already unsteady outlook for the UK power and utilities, said Matthew Williams, co-head of Orrick Sutcliffe & Herrington’s European energy group.
The Brexit vote means that foreign capital investments intended for the UK could be deployed in other geographies, he said.
However, it’s difficult to say if mid-to-long interest in the UK will be muted, the first lawyer said. There has been such a high level of demand for infrastructure type assets of which there are plenty in the UK. This combined with a weaker sterling and perceived lower competition for assets, may attract bidders, he added.
Equity in UK energy and infrastructure assets has just got a lot cheaper and British utilities such as SSE, Drax [LON:DRX] and potentially Centrica [LON:CAN] could be attractive to overseas bidders, the first sector banker said. Although, infrastructure deals have complex leverage structures, so the cost of financing may make transactions difficult, he added.
The other issue is that all power and utility deals are highly influenced by governments and regulators, the second banker said. The policy position of ministers coming in with the new government will be very important to the sector outlook, the first banker said.
Patrick Lemcke-Braselmann, head of acquisition and financing at German asset management firm AREAM Renewable Energy, was also cautious over the lack of visibility. Impacts on purchase prices, and mid-term Forex effects were among the issues where clarity was required before the market could stabilise.
Renewables – growth beyond Europe
The solar market in the UK was already limited before the Brexit vote, said John Dunlop MD at British solar park developer Countryside Renewables.
British, as well as other, project developers are looking at other markets such as the US, Latin America, Asia and the Middle East to grow their business, Dunlop said. So, the impact of the Brexit will be limited as the attractive countries for solar are no longer in Europe, he explained.
EU renewable targets would cease to apply, which is clearly negative for new investments in the UK, although the Climate Change Act would remain in place, said Jens Rosebrock director at renewable energy advisor Ikarus Capital.
Increased exchange rate uncertainty probably does not help incoming investors, and some may get cold feet, Rosebrock said. Volatility from the British pound makes overseas ownership of UK-based solar and wind projects less attractive going forward, agreed a renewables sector advisor.
However, with the pound coming down, the entry level for the investment is now more attractive than a week ago, Rosebrock said. Inbound investment into solar may dry up, the first sector banker said, but offshore wind should stay strong, with the primarily Danish and Dutch investors in the sector unlikely to spurn the UK.