Energy Biz - July/August 2008 - (Page 16) » FinAnciAl Front asset shoppers target utilities JUmp in m&a deals By ken silveRstein tIght credIt won’t prevent utility asset sales. The expected increase in power demand coupled with the need for lots more investment in infrastructure will continue to drive domestic and foreign enterprises to seek opportunities in North America. The objective is to leverage assets and to increase earnings growth. Today’s environment, however, is different from what it was a couple years ago when some megadeals such as Duke and Cinergy were consummated. The lack of liquidity that now exists has trimmed the list of would-be suitors. As such, the firms with the strongest balance sheets that can still get access to debt financing will guide the process. “To get the returns that are most attractive, you need to have lower equity and more debt,” says Michael Rogan, a partner with Skadden Arps in Washington who works on mergers and acquisitions. “If the debt is not available, then you can’t make these acquisitions. An investment-grade energy company that wants to do a deal will still be able to borrow if it has a good balance sheet. That’s why mergers and acquisitions will continue but it will not be as busy as it has been.” Repeal of the Public Utility Holding Company Act of 1935 that restricted utilities’ business activities has attracted more investor interest. But it has also drawn added scrutiny from state regulators who want to ensure that no company is able to exercise undue influence over the market. That’s why the trend overall will be for companies to acquire strategic divisions — those that fit nicely with corporate missions. Regulatory pressures won’t stop acquisitions in their tracks. And neither will tight credit. Despite the effects of the credit crunch that hit in earnest in the second half of 2007, global power and gas deals soared to record levels last year. According to PricewaterhouseCoopers, mergers and acquisitions reached $372.5 billion in 2007, which is a 25 percent jump from the year before. Global deal volume jumped from 623 agreements in the prior year to 768 in 2007, 16 E n E rgyB i z July/August 2008
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