M&A activity in Australian electricity services sector set to increase

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Emerging Issue: Some recent developments in the electricity industry seem to have significantly reduced the volume of services that network service providers (NSPs) outsource to external providers in the electricity services sector.

Reasons for this reduction include:

  • Reduction in NSPs operating expenditure due to recent AER determinations
  • Reduction in NSPs capital expenditure due to overcapacity in the system
  • NSPs are under pressure to reduce costs but many have EBAs in place that restrict forced redundancies. These businesses may resort to insource some functions in order to use their resources more efficiently.

The underlying market trends causing this reduction (e.g. pressure to reduce electricity prices, low or no growth in energy consumption) do not seem to be reversing anytime soon, hence it can be expected that this market, typically a stable and sizeable segment for service providers, will continue shrinking. At the same time, electricity service providers face increasing competition due to:

  • The Australian mining and LNG construction boom coming to an end – engineering and construction companies might not have previously seen network-related work as a business opportunity for them but must now seek alternative sources of revenue
  • Networks bidding for non-prescribed work as well as contestable contracts in other jurisdictions (e.g. TransGrid building a substation in Victoria).
  • Small companies dominating the distributed energy resources market (DER). There are over 4,500 certified solar PV installers in Australia. DER is a growing market but a highly competitive one as well.

MHC believes the combination of a reduced market size and increasing competition will drive acquisitions and consolidation in the Australian electricity services sector, as the incumbents seek to both defend their current market share and access emerging adjacent markets for which they may not have the required capabilities.

Some examples of transactions completed in the last two years are:

  • Downer acquired Tenix in 2014
  • Ferrovial takeover of Broadspectrum in April 2016
  • Consolidated Power Projects (CPP) was acquired by US-listed Qanta Services in 2014, then recently purchased substations design firm Electre-TSD in late 2015
  • Eastern Tree Services acquired distressed Victorian firm Vemco
  • Spotless acquired UAM vegetation management.

These types of transactions are expected to continue in the near future, leading to a market with fewer but stronger players.

Despite the challenging times for many industry participants, electricity service providers with a healthy balance sheet and solid relationships with customers are considered safe investments that attract interest from private equity. An example of this is Underground Cable Systems (UCS), acquired by Hawkesbridge Capital in 2015. Acquisition opportunities like UCS exist in the market, although identification of these opportunities and effective due diligence are a challenge.

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