Small Utility M&A Opportunities
Gerry Yurkevicz is a partner in the energy practice at Oliver Wyman, focusing on utility strategy, mergers and acquisitions, performance improvement, and transformation.
I haven’t met a utility exec yet who does not like to make a big splash. I know what you are thinking: my team and I are pretty good at the utility mergers and acquisitions game when the opportunity arises! I know my peers in the executive suite, understand their motivations, study their parachutes, and talk with the bankers.
However, buying small may be different than buying big. Last month we talked about acquisition opportunities in the small utility segment. Oliver Wyman estimates that the acquisition potential is currently worth around fifteen billion dollars and capable of delivering more than seven hundred million dollars in annual earnings. Investors will need a different approach to buying small.
For larger utilities, investing in the small utility market should be an integral part of their development program. The deal synergies are, in most cases, natural and compelling.
In my view, utilities need to focus on three areas to have the best chance of success.
Get to know your target: You need to develop a thorough understanding of potential smaller utility targets so that you can act quickly and decisively when an opportunity arises. Senior management should forge close relationships with their counterparts in smaller organizations. Utility execs tend to stick with their bigger buddies.
It’s never too early to talk with regulators: You should lay the groundwork with regulators by understanding customer, business and regulatory issues facing smaller targets. Informally test the waters with regulators as early as possible.
Build internal acquisition capabilities: making smaller deals work takes time and careful planning. An experienced team and great internal processes can help to speed up your ability to be proactive and cost effective with smaller deals.
It’s true that larger utilities generally have a competitive edge over other investors when it comes to investing in smaller utilities. However, there are tactics that non-utility buyers such as infrastructure funds and private equity firms can use to improve their prospects.
Waiting for the next deal to come from banks isn’t the best strategy for private investors. I believe they should develop targets proactively by sifting the market for the right opportunity to tease out a deal. There are a number of unique and special utility acquisition situations in the market right now that require legwork, but could yield a good outcome for the committed buyer.
Investment managers should also look for markets where they are likely to have a distinct advantage because utility buyers may be constrained from participating. There may be local issues relating to customers, rates, regulation or jobs.
A buyer will have to pay at least market to secure the right deal. Premiums can be justified by a combination of thorough pre-acquisition planning and analysis, and by putting in place a strong management team that’s motivated by the right incentives after completion.
While these specific tactics can certainly help to enhance any buyer’s prospects, there is a simple truth to accept: The more proactive you are, the more successful you’re likely to be in the small acquisition game.
