China

China

Appetite for acquisitions gains momentum

There are clear signs that the mergers and acquisitions (M&A) market in the wind power sector is picking up. We are seeing a larger number of deals coming through. Early last year, Spain's Iberdrola Renovables acquired the El Andevalo wind farms from Gamesa Energia for EUR320 million. In May, Italian Enel Green Power acquired a 60% stake in Spanish Endesa Cogeneracion y Renovables for EUR1.1 billion. And American United Technologies took over UK-based Clipper Windpower in October by buying the 50.1% stake it did not already own.

Four key drivers make wind energy investments an attractive proposition. First, valuations and capital requirements. Collapsed valuations have allowed companies with strong balance sheets to cherry-pick acquisition targets. When companies have difficulties financing their day-to-day activities, opportunities arise for cash-rich investors able to fill the financing gap.

Policy support is another driver. The global push to decarbonise electricity generation and create jobs has led many countries to promise incentives for low-carbon energy sources. The impact of these stimuli on M&A activity in the wind sector is now starting to become apparent.

Availability of debt is the next driver. Over the past few years the price and availability of debt has been restricted. As market fears subside, lenders will gravitate towards wind power due to government-backed mechanisms that provide regular and secure cash flow.

Finally, the identity of buyers is changing. M&A activity in wind power is now being driven by companies outside the renewables sector. Infrastructure funds, private equity houses and other financial investors are increasingly getting involved.

Companies looking to make a wind energy acquisition must look out for four golden rules. Due diligence is crucial, as the "bankability" of an acquisition target is essential. When buying a company that is under financial stress, contractual protections can be of little use to the buyer. Through due diligence, the buyer will be better able to safeguard its position by fully understanding the risks and liabilities inherent in the transaction.

Whether to opt for share or asset acquisition is an important decision. As a buyer's market, the wind sector currently offers opportunities for buyers to negotiate asset - as opposed to share - acquisitions. This may enable a buyer to cherry-pick the wind assets it wants while leaving unattractive assets or liabilities with the seller.

Alternative forms of consideration should also be assessed. If the buyer is a listed company, it may wish to offer share consideration as an alternative to all or part of the cash consideration payable for the target. This would reduce the amount of cash the buyer needs to finance the deal and could be attractive to the seller if equity markets rise in 2011-12.

Deferred consideration is the fourth golden rule. Wind assets can be difficult to value, especially if a project is still in the development or construction stages. Buyers may want to consider deferring an element of the consideration until planning permission has been granted or the project is operational, for example.

Because the wind sector offers attractive long-term growth, we anticipate an increased appetite for M&A transactions in 2011. Valuations are expected to recover this year as competition for takeover targets intensifies and financing conditions improve. The key message for prospective buyers of wind companies or assets it to ensure their deals are structured to deliver value.

Farook Khan is a partner at law firm Pinsent Masons and is a member of the firm's energy sector team. He can be contacted at farook.khan@pinsentmasons.com or on +44 (0)161 250 0205.

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