• Fossil fuel deals to play crucial role in energy transition
• Nuclear power attracts capital as industry sheds stigma
• Infra funds ‘protagonists’ of energy transition while long-term returns draw wider investor pool

Dealmaking in Europe, the Middle East and Africa’s (EMEA) energy sector is set to surge, shaking off a sluggish year, as a broader pool of investors focuses on renewables, and fossil fuels continue to feed the pipeline for a time to come, dealmakers said.

“There’s a tendency to take a binary perspective, with carbon as bad and low-carbon as good, but it’s all part of the energy transition and there’s a strategic purpose to energy deals,” said Graham Watson, Partner and Head of Global Energy at Freshfields. “On a simplistic level, the industry has been spending less on exploration so M&A will continue to be key in the energy transition, including as one lever for achieving low-carbon targets.”

As high interest rates continued to bite and geopolitical uncertainty wreaked market havoc, 2023 deal volume in EMEA Natural Resources (including energy, utilities and oil and gas – O&G) plunged to USD 101bn across 955 deals in 2023 from USD 154bn over 1,044 deals in 2022, Mergermarket data shows.

While it represented just half the deal volume of 2021, which stood at USD 202bn, a closer look at 2023 deal activity paints a brighter picture. A host of large-cap energy deals bolstered volumes and were largely driven by O&G majors – a clear indication that fossil fuels have their part to play in the energy transition.

The pending acquisition of STEAG, one of Germany’s largest utilities, by Spanish private equity firm Asterion Partners for an estimated EUR 2.6bn, is a case in point, with the buyer aiming to transform STEAG into a “sustainable energy generator,” developing green technologies such as solar and wind power.

Meanwhile, the highly anticipated mega-merger of Austrian oil major OMV [VIE:OMV] and Abu Dhabi National Oil Companys‘ (ADNOC) chemicals businesses for an estimated USD 30bn, and UK-based Neptune Energy’s pending takeover by Italian energy major Eni [BIT:ENI] for USD 4.9bn, signal similar deals are on the way.

“I don’t think renewables can replace fossil fuels. What has emerged very clearly is that the energy transition is not about a single global strategy. At least as far as Italy is concerned, it’s clear that we can’t get rid of gas as the lowest-emission fossil fuel,” said Umberto Salvi, Partner at Clifford Chance and head of the firm’s Energy and Infrastructure division.

The anticipated sale of GasNet, the Luxembourg-based natural gas distributor, highlights enduring investor appetite in the traditional energy sector, with Czech energy producer CEZ [PR:CEZP] expressing early interest in the asset. GasNet has a Likely to exit (LTE) score of 57 out of 100, according to Mergermarket’s predictive algorithm*, largely due to the number of reports around a sale of the business and the sponsor exit rate in the region over the last six months.

Renewables to rally following rocky year

Dealmaking in the renewable energy sector was hit by 2023’s headwinds including supply-chain volatility and lower-than-expected subsidies. Volumes were down 3% YoY, falling to USD 25.2bn over 73 transactions in 2023 from USD 26.02bn across 93 deals in 2022, as per Mergermarket data.

But, despite challenges, capital continues to flow into low-carbon technologies, bolstered by government initiatives and private sector support as environmental, social and government (ESG) considerations increasingly shape dealmaking in the run-up to Net Zero.

Deal volume for 2H23 in renewables rose 52.6% to USD 16.8bn across 38 deals compared to USD 11bn across 52 deals in 2H22, Mergermarket data reveals, with the acquisition of the UK’s Lightsource BP Renewable Energy Investments by BP [LON:BP] for USD 4.4bn among top pending deals.

“The question of renewable energy is heavily influencing dealmaking with investment committees increasingly basing decisions on Net Zero scenarios,” said Clifford Chance’s Salvi. “Bidders are now choosing to withdraw from auctions based on long-term ESG considerations,” he added.

The United Nations pledged to triple current global renewable power capacity to 11,000 GW by 2030 at its COP28 Climate Change summit last year, highlighting the crucial need for capital – and abundant investment opportunities – in the energy transition.

A packed deal pipeline shows there’s plenty to come this year. District heating, an energy-efficient heat distribution method for residential and commercial settings, is high on the agenda and is gaining in traction with investors, particularly large-cap infrastructure-focussed private equity funds.

The acquisition of Coriance, a French district heat network operator, by Vauban Infrastructure Partners and state-owned Caisse des Depots et Consignations (CDC) in October for a reported EUR 1.6bn was one of the most hotly contested auctions in the space last year, attracting a host of big-cap sponsors.

Meanwhile, French network provider Idex will reportedly be coming to market this year, with owner Antin Infrastructure Partners hoping to fetch over EUR 3bn for the asset. Idex has a LTE score of 55, based on sale intelligence on the business and sponsor exit rates by region and sector. Meanwhile, German utility major Uniper [ETR:UN01] is prepping the sale of its district heating business, engaging Rothschild to shop the asset, which could be valued at up to EUR 400m.

Nuclear power is another sector on investors’ radar, according to dealmakers, as the industry sloughs off legacy issues, with public and private sector capital fostering growth in nuclear power technology, notably Small Modular Reactors (SMRs).

“We see a lot of activity in nuclear power technology. It has longer time horizons than industries like shale, is slightly slower moving and attracts bigger tickets,” according to Freshfield’s Watson.

M&A in the space is picking up with the US market leading the way, and Europe hard on its heels. France is a key driver after President Emmanuel Macron gave the greenlight to several nuclear reactor sites in 2022 and has committed billions of euros to support early-stage nuclear projects.

In October 2023, PE-backed French industrial conglomerate Groupe ADF acquired the nuclear maintenance business of Engie Solutions, the energy efficiency subsidiary of listed domestic energy major Engie [EPA:ENGI].

Deals in the pipeline include the UK’s Sizewell C nuclear power project, drawing prominent energy players like UK energy utility Centrica [LON:CAN]. The UK government is seeking investors “with infrastructure experience” to help finance the GBP 800m project, as reported.

Investors are also betting big on nascent nuclear technology, with Karnfull Next a case in point. The Swedish nuclear company is seeking further investors for a pipeline of SMR projects, targeting family offices and fossil fuel players looking to get a foothold in low-carbon nuclear power industry.

“Nuclear is a possible replacement [for fossil fuels]. The new wave of small rectors makes it a strong contender – the technology is pre-manufactured, modular and it’s a circular economy as it’s fuelled by hazardous waste,” according to Salvi.

Coupled with the fact that it can be easily joined up to the network, nuclear technology could significantly decrease our need for gas, he added.

Infra funds leading march to Net Zero

Dealmaking in the renewables sector will focus heavily on investment in new infrastructure as emerging technologies enter the grid.

Infrastructure funds will therefore be key players in the coming years, with a crucial role to play in scaling nascent, high-risk renewables technologies sorely in need of investment like nuclear, hydrogen and energy storage, according to Salvi.

“Major infra and pension funds are the real protagonists of the energy transition and will drive much of the activity in the coming few years. They have very long exit horizons that are less affected by rising interest rates than traditional private equity investors,” he said.

“The energy transition is happening and deals must get done. You can’t hit pause, regardless of current rates … if it’s a strategic asset, there’ll be a rush of infra buyers,” he added.

For Watson, lucrative, long-term opportunities in the energy transition are attracting a wider pool of investors than traditional financial buyers, who are more focussed on returns than being dogmatic about exit cycles.

“When you broaden out the waterfront of capital advisors in energy, it’s much less compartmentalised than five to ten years ago. Today, almost anyone with capital is a potential investor in all aspects of the energy transition.”

*Mergermarket’s LTE predictive analytics assign a score to sponsor-backed companies to help track and predict when an exit could occur through M&A, an IPO, a direct listing or a deSPAC transaction.