Mergers and acquisitions -- Low risk, high returns

WORLDWIDE: With wind projects around the world changing hands at an uprecedented rate as cash-strapped utilities look for a quick return on their long-term assets, we investigate the various drivers behind this recent flurry of mergers and acquisitions.

Growing business… Nearly $40 billion was spent on renewable energy M&As in 2014, with wind to the fore
Growing business… Nearly $40 billion was spent on renewable energy M&As in 2014, with wind to the fore

A red-hot market for wind energy assets is opening up more options than ever for project developers to decide how and where they want to play in the sector.

"There is lots of money out there and I think that, going into 2015, it is probably the best market in the past six, seven, eight years that a developer could have," said Ted Brandt, CEO of Marathon Capital, at February's Infocast wind power finance and investment summit in San Diego. "There is demand for virtually everything a developer could bring into play. We are seeing more liquidity and more choices."

Nearly 22GW of operating development assets changed hands in 2014, says Brandt, up sharply from the 10GW of deals in 2013. And the trend is not just confined to the US market. Renewable energy mergers and acquistions (M&A) worldwide more than doubled to hit a new high of $38 billion in 200 transactions in 2014, says a recent report by Ernst & Young, with transactions involving wind energy making up close to 41% of the total deal volume and 38% of the total deal value.

"This was an unusually large year, and I think it's a sign of things to come," says Matt Rennie, the firm's global transactions leader for power and utilities.

Top of the M&A target list are operating wind projects with long-term power purchase agreements (PPAs), and the market for them is fiercely competitive, says Rennie. In Europe, for example, slumping wholesale electricity prices are pushing utilities to sell individual plants or stakes in wind energy portfolios to generate enough cash to pay down debt and fund expansion into growth markets. They are finding an eager pool of buyers in the form of pension funds and infrastructure investors, both foreign and domestic, who are increasingly seeing wind energy as a viable long-term investment. "You have a willing meeting of buyer and seller, both with completely different motivations," says Rennie.

Cleaning up

Financial investors are not generally interested in taking on a lot of risk, and the contracted cash flows from wind energy projects provide the stability they crave. Investments also earn them returns that look pretty attractive relative to almost any alternative in today's low-interest rate environment. "To be able to get after-tax leveraged returns 800 or 900 basis points higher than ten-year government bonds is pretty extraordinary," says Brandt. "We're seeing the market's recognition that this is not a bad place to put money."

Pension and infrastructure investors are meeting their competitive match, however, with the entrance of a relatively new star in the buyer universe. Over the past two years, principally in North America, a number of renewable energy companies have spun off new publicly traded subsidiaries known as yieldcos. Their purpose is to hold operating plants with long-term power contracts that generate reliable cash flows paid out to investors in the form of dividends. To maintain value for shareholders, yieldcos need to keep adding to their portfolios, and that is sending them out into the M&A market in a big way. "They are vacuuming up assets - and they are like absolute vacuum cleaners - at high prices. This has made a lot of people holding operating assets figure this is a good time to sell," Keith Martin, a partner in the law firm Chadbourne and Parke LLP, told Infocast delegates.

The heightened competition is having a ripple effect in other parts of the business as well. Since the 2008 financial crisis, buyers in the M&A market have shunned anything that smacks of development risk. But recent deals indicate that project pipelines are starting to receive investor attention again. SunEdison's headline purchase of US-based First Wind last November for $2.4 billion is case in point. The company paid a premium to obtain a development team with an active pipeline of projects, not only to provide a platform from which to launch into the global wind sector, but also to provide a ready source of new projects and technological diversity for SunEdison's yieldco subsidiary, Terraform Power.

"What it does is speak to the growth story. You can look forward as it relates to the pipeline several years out," said Terraform president Chris Moakley.

Early adopters

Some institutional buyers have started targeting purchases earlier in the development cycle, says Brandt, taking on more risk to improve their chances of acquiring projects and at the same time earn more of a return than they could from a higher-priced operating asset. There is also more appetite for joint ventures and other partnerships with developers who might not be interested in an outright sale. "It is easier for the developer to stay in the project and effectively be the legs and brains, when ten years ago they were almost automatically being bought out for a developer fee and a sayonara," Brandt says.

For some companies, the strong demand for cash-producing assets is an opportunity to play both sides of the M&A field. Baywa Renewable Energy Wind, for example, has been actively acquiring late-stage development projects in the US, shepherding them through construction, and selling them on to long-term owners for a profit once they reach commercial operation. Its strategy is being helped along by industry concerns over the future of federal production tax credits, and tight timelines to bring projects into service to qualify for the subsidies while they still exist.

"It creates uncertainty for a lot of people and we see opportunity in that and have capitalised on it," says Baywa CEO Florian Zerhusen.

Emerging hot spots

While the trade in mature projects has made Europe and the US the major hubs for wind energy deal activity, new M&A hot spots are emerging as well. Transactions across the broader power sector in markets such as India, Mexico, the Middle East, Africa and Latin America saw an all-time high last year, says Ernst & Young's Rennie, with wind energy playing a significant part. Energy market reforms in Mexico have opened the door to the installation of 9.5GW of wind by 2018, for example, while Brazil continues to contract for new wind energy capacity. Sub-Saharan Africa is on the radar of investors as well.

"You need something like 100MW of power for a billion dollars of GDP, and the African countries are waking up to this. We are starting to see electrification as one of the drivers for economic growth overall, and I think that will drive people down the path of wanting more power," says Rennie. "And once you start thinking about more power, you are really having a discussion about fuel mix. Given that Africa overall is looking for something like 300GW of additional generating capacity by 2030, we're going to see a lot of wind power get put in over that period."

European utilities in particular are recycling the cash gained from the sale of generating assets to gain a foothold in these emerging markets, spending over $20 billion last year on conventional and renewable energy acquisitions outside their continent. Major players in North America are also increasingly looking beyond their borders, as evidenced by Pattern Energy's recently announced joint venture with local firm CEMEX Energia to build at least 1GW of wind and solar in Mexico in five years. Many companies from established markets are similarly managing their geographic expansion by means of local partnerships, says Rennie.

"This kind of investment has a much higher rate of return but can take a lot longer and involve a lot more risk because the market is being created around you in a lot of cases," he says. "The ideal way to enter a market is via a joint venture with a local firm that understands and can influence the regime as it develops. That way they can share some of the upside on the rate of return, but also can control the development of the market a little more actively than they could sitting in an office in London or Denmark or wherever they are."


Bringing a wind energy project to a construction-ready state is by far the best way to maximise its value in today's mergers and acquisitions (M&A) market, but the high cost of this is a burden not every developer can carry.

"Without a doubt, once you de-risk a project, you enter into a brand new class of investor," said Rahul Advani, a principal with Energy Capital Partners, at the Infocast summit in February.

Yieldcos, pension funds and infrastructure investors are all hungry for wind energy assets, but most are not interested in looking at projects until they have at least reached the notice to proceed (NTP) stage, when the owner green lights construction.

"The problem you have, if you are holding on to NTP, is that you are funding a project all the way to NTP. And, as a lot of people are aware, that's a big cash drain on you as a developer," said Advani. "You are going to look for creative sources of financing, and those aren't cheap. It's a tough slog. The thing you have to work through if you are going to be successful in the M&A market is to try to get your project viable as early as you possibly can, minimising who you borrow from, and who you ultimately take equity from."

Selling to safe hands

For developers forced to sell at an earlier stage in the project development, the most important decision is finding a buyer with strong execution skills. Most developers will not get paid in full for a project until it is completed and comes online.

"You have to go with people you trust and who have the resources and capabilities to take the project from where it stands today to an operating project," said Eric Bjonerud, senior associate in mergers and acquistions at SunEdison.

There also needs to be a willingness to work on solutions for any development issues that remain. "What I like to do is create an environment where everybody is thinking about how to solve these problems together. If you have a seller who is solely focused on getting the most money, it is that much harder to get wind projects built."

A significant concern for acquirers at any stage is potential project revenue. Although there is an overwhelming preference in the market for fully contracted assets, having a long-term power purchase agreement (PPA) is no guarantee that a project will find a buyer. Intense competition for PPAs has pushed some developers to bid prices that are too low to convince potential buyers of their projects viability.

"We knock down 90% of the projects we see even though they are contracted. That's the sad bit," said Florian Zerhusen, CEO of Baywa Renewable Energy Wind, which has been acquiring projects in the late development stage and selling on for a profit once they are operational.

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