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This year’s Australian M&A Outlook: Energy, Utilities & Resources (EU&R) underlines just how important environmental, social and governance (ESG) performance has become to both buyers and sellers. More than ever before, ESG is driving deals activity across the EU&R sector (in Australia and overseas). In fact, the global push towards decarbonisation has made ESG the leading factor when determining, protecting, and creating value in many EU&R deals.
Below, we look at how ESG and other trends are shaping investment in Australia’s EU&R sector in 2022. We also reflect on what this means for dealmakers.
Current landscape
As 2022 unfolds, Australia’s EU&R sector is experiencing robust commodity prices and generous availability of capital. However, concerns remain about potential interest rate rises and supply chain security (exacerbated by geopolitical tensions in Russia and China).
When directors in the EU&R sector meet to discuss strategy, the ‘E’ in ESG is a recurring theme. The world’s long-term trajectory towards decarbonisation and energy transition is prompting a range of responses. Some companies are seeking to shed their carbon intensive businesses and/or pursue deals to build capability and capacity in renewables. Others are taking a more gradual approach, seeing the medium-term value in legacy and transition resources. Meanwhile, many other companies have yet to commit either way.
- Mining
- Oil and gas
- Power and utilities
Mining
In a relatively short space of time, critical minerals have become far more important in the commodity landscape, particularly in the battery sector. Decarbonisation means future demand is likely to escalate for these minerals – and that’s where the value lies. As the western world seeks access to (and certainty in) supply chains, investors are scouring the Australian and global markets for opportunities.
Oil and gas
Understandably, the global energy transition is dominating the deals agenda in Australia’s oil and gas sector. By 2050, it’s likely that the world’s reliance on oil and gas will have greatly reduced. By then, many of today’s oil and gas businesses may have evolved into hydrogen and ‘clean gas’ businesses.
Power and utilities
Global power and utilities deals activity has rebounded to pre-pandemic levels, with industry participants repositioning their businesses and rationalising portfolios. The energy gentailer model appears under threat with most large operators undertaking strategic reviews and exploring divestments or demergers.
European renewable players; oil and gas companies; and telecommunications businesses are all considering entering energy retailing as ‘competition for the home consumer’ intensifies.
On face value, coal-fired generation appears problematic due to ESG concerns, but recently announced M&A activity shows there are willing buyers prepared to invest and fund the energy transition.
Market outlook for 2022
ESG may be a long-term game, but deals need to be struck today. The ESG agenda will shape corporate strategies across EU&R for the remainder of 2022 and beyond. Deals will reflect the desire to optimise portfolios and access new markets via consolidation or capability plays. Supply chain concerns will also stimulate deals activity.
Oil and gas
While the energy transition is accelerating, it won’t happen overnight. As a result, oil and gas companies (and investors) will differ in terms of their strategic responses.
With an eye on the long term, some companies will seek to exit oil and gas, while purchasing assets and/or capabilities that contribute to energy transition and carbon abatement. Other buyers will double down on oil and gas because they expect value to remain for the next decade at least.
Mining
In 2022, supply chain vulnerability from China will only increase the appetite for deals that provide security and access to critical minerals in Australia. Exploration and development will continue to attract high multiples.
Competition for critical minerals deals will come from existing critical minerals producers, other traditional miners (as they rethink strategy, diversify and futureproof their portfolios) and, potentially, from battery/electric vehicle producers. Likewise, interest will remain high for acquisitions that provide capability, such as battery technology for use in mining fleets.
Several of the largest global deals in the past year have involved traditional consolidations in copper and gold. We expect such transactions to continue in Australia amid a globally competitive market and as business leaders focus on acquisitions to address security of supply, portfolio optimisation, and cost offsets, to create value.
Trading houses, sovereign wealth funds, pension funds and private equity
Globally, we’ve already seen these investor groups step up their investment in renewables projects and the ripple effect of that is being felt in Australia in 2022. We expect houses to continue divesting minority stakes in liquid natural gas (LNG) and coal projects, and to increasingly invest in renewables projects. In doing so, they will seek to leverage their trading arms and customer relationships in the LNG sector and transition these to the hydrogen sector. In respect to critical minerals, we expect trading houses, sovereign wealth funds, pension funds and private equity to pursue value-added processing and mining infrastructure assets.
Power and utilities
As we progress further into 2022, we expect an increasingly diverse marketplace across different aspects of the power and utilities value chain, as ESG drives investment strategies and deal activity.
New entrants are likely to compete in the energy retail sector. These will include pension funds and specialised infrastructure funds (alongside existing power producers) investing in renewable generation and firming capabilities (e.g. batteries) and newer technologies (e.g. biofuels, hydrogen). These will also include investors in fossil fuel generation driven by short-term time horizons and seeking quick returns (as others exit for ESG reasons) and/or energy transition funds seeking to influence the energy transition through technological innovation and decarbonisation.
What's next for dealmakers?
To thrive in this dynamic marketplace, Australia’s business leaders need clarity on their long-term strategies and their fields of play. Only with a clearly articulated strategy can dealmakers allocate capital to achieve long-term value and returns.
Many corporate strategies will require a rebalancing of portfolios and a pursuit of value creation opportunities in ESG growth areas such as renewables, carbon capture, battery storage, hydrogen, transmission infrastructure and other clean technologies. In these cases, strategy needs to be set now so that deals activity can secure the right capabilities and assets.
Explore more industry trends as part of this series
National findings
Deals market ripe with opportunities and buzzing with activity
National findings
In 2021, Australia was a hive of M&A activity across most market sectors. The buzz is continuing in 2022, driven by growth ambitions and access to capital, although geopolitical tensions and possible interest rate rises may temper valuation expectations among bidders.
Infrastructure
With competition and capital both high, buyers are thinking outside the box
Infrastructure
This year’s Australian M&A Outlook: Infrastructure signals another busy year ahead. While traditional government privatisation (or ‘capital recycling’) deals remain thin on the ground, funds still have capital to deploy, so more creative transactions and ‘Core Plus’ strategies will dominate. For buyers, that means thinking outside the box.
Financial Services
A buoyant market with many more deals bubbling up
Financial Services
With another wave of deals coming this year, our Australian M&A Outlook: Financial Services reveals what’s brewing beneath the surface. While incumbents will be hunting for growth, scale and capability, and private equity firms will explore various sub sectors of financial services, there may be macroeconomic storms ahead.
To succeed in these conditions, dealmakers, more than ever, will need clarity on their strategic priorities to allow them to act decisively when opportunities arise.
Health
Busy year for dealmakers with capital, competition, and valuations all high
Health
Following a record year for deals (in terms of volume and value), this year’s Australian M&A Outlook: Health suggests another flurry of deals will be struck in the healthcare services sector. This is underpinned by increased competition for transactions, new sponsors, available capital, and strong valuations.
Retail and Consumer
Revealed: Australia’s retail and consumer trends that dealmakers need to know
Retail and Consumer
With consumer sentiment still in the recovery phase, this year’s Australian M&A Outlook: Retail & Consumer pinpoints the sub-sectors and trends for dealmakers to watch. In 2022, retail and consumer M&A activity has been somewhat tempered by inflationary pressure (which is likely to push interest rates up faster than expected), ongoing supply chain issues, recent floods in NSW and Queensland, and geopolitical tensions. And while the federal budget provided some short-term economic stimulus, this won’t fundamentally alter the deals landscape.
Technology, Media and Telecommunication
How dealmakers can capitalise on Australia’s red-hot TMT sector
Technology, Media and Telecommunication
Australia’s Technology, Media and Telecommunications (TMT) sector has had its hottest year in deals in a decade, with M&A activity hitting a ten-year high in 2022. This year's Australian M&A Outlook: TMT signals dealmakers are seizing opportunities as the three key trends driving deals – demand for data, digital transformation, and a re-evaluation of traditional asset ownership strategies – remain dominant this year.
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Contact us
Paul Hennessy
Partner, Advisory, Deals Energy & Resources Leader, PwC Australia
Tel: +61 8 9238 3327
Andy Welsh
Partner, Advisory, Infrastructure Deals Leader & Utilities Deals Leader, PwC Australia
Tel: +61 438 165 536
Lachy Haynes
Partner, Advisory, Energy Utilities & Resources, PwC Australia
Tel: +61 499 039 476