Canadian power and utility deals surpass global activity in Q1, but outlook remains cloudy: Ernst & Young

Canadian investors contend with new industry challenges

TORONTO, May 29, 2012 /CNW/ - Canadian power and utilities (P&U) companies may face an uphill battle when it comes to investing this year, despite positive mergers and acquisitions (M&A) activity in the first quarter (Q1) of 2012, says Ernst & Young.

According to the new report Power transactions and trends: global power and utilities mergers and acquisitions review, Q1 2012, Canada was one of the most active countries by bidder in Q1 and the most active cross-border participant in the US, featuring in two of the top 10 deals of the quarter.

"The next 12-month period is shaping up as one of the most critical times in recent memory. How companies position themselves now will shape their long-term future," says Steve Power, Leader of Ernst & Young's Canadian Power & Utilities practice. "Canadian P&U deal activity may have soared in Q1, but the low cost of natural gas is already having a significant knock-on effect on global M&A activity that's sure to dampen deal appetites in Canada, making for challenging times ahead."

The combination of continued economic uncertainty, tightening financial markets and disparity in global gas pricing resulted in Q1 2012 total global deal volume falling 30% from Q4 2011 and a 16% drop in corporate deal volumes year on year.

While the P&U industry is approaching an inflection point, where competing pressures of environmental regulation, sovereign instability in Europe, government austerity programs and decade-low natural gas prices in the US are colliding, the opportunity for Canadian companies to invest globally remains open.

However, the proposition to invest in renewable energy has also been re-evaluated by many investors as they move forward with caution. The lack of government support and uncertain regulatory schemes, combined with low natural gas prices across North America and globally, have had a cooling effect on investment appetite.

"Canadian P&U companies should be looking to invest in emerging economies — where the growth prospects far exceed those in developed nations — and extend their global reach," says Power. "But new risks and challenges brought on by continued economic uncertainty could temper investment. Canadian P&U executives must be nimble when it comes to assessing business cases and investment portfolios to seize global opportunities."

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