Flipping the Script on the Past
Thomas Flaherty III is a senior advisor to EY-Parthenon, Ernst & Young LLP. Mile Milisavljevic is a Partner in EY-Parthenon, Ernst & Young LLP. Jeffrey Miller leads the EY Americas Power & Utilities Strategy practice.
The drought in utilities sector mergers and acquisitions (M&A) is unlikely to continue much longer: there's too much interest in the value such transactions can unlock. As interest rates eventually decline, balance sheets become more durable, cash flows stabilize, stock valuations converge, and lower premiums emerge for mergers of equals, M&A in utilities will be primed to return as a conventional means of creating shareholder value.
The U.S utilities industry has a long history of consolidation, spanning over one hundred thirty years. Formative consolidation started with the purpose of knitting together regionally and nationally disparate groupings of more than six thousand localized utilities into multilayer holding companies.
From the early 1900s to the 1920s, this financial conglomeration resulted in massive consolidation of complex cross holdings. These structures led to financial abuses that made national headlines and captured the interest of federal lawmakers. The result was the passage of the Public Utility Holding Company Act of 1935 and the restructuring and streamlining of the holding company model.