Fast-growing energy businesses increasingly looking towards M&A for growth

M&A remains essential to Europe’s fastest-growing energy companies. As fast-growing energy companies seek to scale up at an accelerated pace, inorganic growth will be an increasingly significant element of their strategy

Acquisitions can open doors to new markets or product and service lines that might otherwise remain closed, as well as access to invaluable technology and talent. But dealmakers need to be certain of their objectives, whether it is to enter new markets, increase market share or acquire new technologies – or risk losing value on the deal.

More than a quarter (27%) of fast-growing energy businesses agree that M&A will be one of the most important factors driving their growth over the next three years. Similar numbers (26%) have already garnered substantial growth benefits from their M&A activity.

“Investments and expansion have been at the heart of our business growth,” says the COO of a French energy business. “Our strategy has been to expand the geographies in which we operate and to ally with other organisations that will supply additional revenue. This focus will remain for the next three years.”

In fact, on average, respondents anticipate 43% of their revenue growth coming from M&A over the next three years, up from 38% over the past three years. That implies a substantial increase in the number of deals these businesses will aim to complete.

Deal drivers

Two factors are driving that increase. First, large utilities are looking for new business models and ideas. Second, the growing renewables industry offers a steady and reliable revenue stream, attracting interest from financial investors including insurance companies and pension funds as well as more traditional infrastructure funds.

Any increase in dealmaking will require more resources and many fast-growing energy companies are making plans accordingly. While they have allocated 39% of their capital to M&A activity in the past three years, this is now set to increase, to an average of 43% over the next three years.

The shift towards renewables is driving the need for more storage and site control in the grid, and therefore the need for smart solutions. Established utilities players could face challenges in this environment, as they have historically been focused on large-scale projects. Acquiring smart young companies, which are more flexible, is one way around this challenge.

By contrast, very few fast-growing energy companies are focused on deals that could help them grow in new geographies: just 6% cite this as a goal for the next three years, slightly up from 5% previously.

While the emerging markets of regions such as Asia no doubt offer opportunities that may become more alluring over time, the investment required to move into global energy markets may also be prohibitive for all but the largest companies – and while renewables and alternative energy offer exciting opportunities closer to home, these are likely to remain the priority.

While many companies surveyed plan to conduct M&A, they also had significant concerns. Almost half (49%) point to the unstable political environment as a bar to dealmaking, while 44% are concerned about legal and regulatory issues.

Not least, high prices in a competitive marketplace are a constant concern. With 23% of the fast-growing businesses in this survey worrying about competition from other businesses, the CEO of one Spanish energy company says: “Valuation is the biggest barrier we face.”