In this article, we offer a panorama of the merger & acquisition (M&A) landscape in Europe and examine various valuation methodologies used in M&A for the renewable energy sector, an area of growing economic importance. We explain the key aspects that must be considered, the potential pitfalls to avoid and give our recommendation on the most suitable methodology for M&A transactions in the renewables space.
Renewables: a growing and predominant energy sector
Renewable energy is the future for our European and global economy. Projections estimate that two-thirds of the power generation mix in the world will come from renewable sources (including hydro) by 2050, up from 25 % currently, and 50% of total generation will be delivered by wind and solar PV alone. This expected growth will translate into an average investment of USD 297B a year until 2050 just for wind and solar assets.
In Europe, the share of renewables in the power generation mix is expected to see a colossal increase from 44% in 2020 to 90% by 2040, with wind and solar making up the bulk of it.
The key driver for these massive investments to come is undoubtedly policy. The European Union (EU) has declared its long-term commitment to become climate neutral by 2050 with 100% of electricity generation coming from renewable energy sources through the European Green Deal. This ambitious plan consists of various regulatory, policy and financial tools aimed at triggering the necessary investments to support the intended full decarbonization of the energy sector. This will be accompanied by steadily decreasing costs of renewable energy and continuous innovation to allow for its scaled-up technical integration.
In the short term, this translates at a country level into tangible measures such as in Germany, where there are plans to install annually 2.9 GW of onshore wind and 2.5 GW of solar PV projects within the next 10 years. In Spain, 5.0 GW and in Italy, 4.0 GW (of which 3.0 GW will be solar) of renewable energy projects are planned per year in line with their respective national strategies to reach high levels of renewable energy penetration within the next five to 10 years and to align with the EU’s long-term carbon-neutral objectives.
Capital markets’ strong appetite for renewables, despite the COVID-19 crisis
These concrete figures underpin the belief that long-term investment in renewable energy will be a cornerstone of present and future capital allocation, even in difficult times. Recent markets trends and investors’ behaviors reinforce that belief: the market capitalization of the top 25 European utility companies only fell by 5.0% year-on-year during the peak of the COVID-19 crisis in April 2020, while the general Eurostoxx 600 index declined by 13.0% year-on-year over the same period. Meanwhile, the share of pure renewable energy utilities saw their price increase in the same period: EDPR’s share went up by 22.7%, Orsted by 34.0% and Iberdrola by 13.7%, while thermal players went down such as CEZ with a decline of 17.3% and Verbund with a decrease of 13.6%.
Private sector players and especially renewable energy developers, Independent Power Producer (IPP) owners and global utilities are therefore well-positioned to play a decisive role in this long-term trend and can take advantage of numerous greenfield investment opportunities for the development of new renewable energy projects.
The appetite for investing in brownfield assets and renewable energy companies is also strongly growing, especially from firms looking for yield-stable assets as well as from energy companies eager to expand their portfolio. Investment interest is also being shown by non-energy companies who are diversifying their activities and betting on the long-term growth of renewable energy. This general trend is materializing into numerous acquisition transactions.
Corporate M&A – recent trends
The acquisition of single PV or wind assets dominates the renewable energy M&A landscape, but corporate M&A transactions in the downstream IPP sector are also taking place globally with sizeable deals. For example, Morgan Stanley Infrastructure acquired 40% of German wind energy project developer PNE’s shares by January 2020 and Portuguese gas company Galp Energía purchased ACS’s subsidiary “Zero-E” for EUR 2.2B in January 2020. In February 2020, NPM Capital, the private equity arm of SHV Holdings, acquired a majority stake in Greenspread and Solaris Industria, two Dutch developers and operators of renewable energy projects. In April 2020, RP Global, a renewable energy IPP, acquired a 50% stake in Enery, an Austria-based renewable energy platform. And now, majority shareholders of prime energy developers such as Mainstream Renewable Power, based in Ireland or ib Vogt, headquartered in Berlin, have publicly announced their intention to look for strategic investment partners.
A low-interest rate environment and a rather competitive and fragmented developers’ landscape, especially in Europe, favor M&A activity and the further consolidation of the renewable energy market. For any economic actors eager to create or expand their renewable energy portfolio globally, there are opportunities to acquire IPP long-term owners or pure developers with a “build-and-sell” strategy. What any buyer would acquire are not only existing operating assets and related existing cash-generating activities, but also a development pipeline and the target company’s future ability to develop, build and monetize new power assets.
How to value your renewable energy corporate target
Common hazards to avoid
The main obstacle that may be encountered concerning the acquisition of IPP owners or pure renewable energy developers is the valuation of the target company. Renewable energy downstream players encompass diversified activities in the downstream value chain that are distinct from each other and may not be adequately reflected at the corporate consolidated level.
Typically, the business portfolio of an integrated IPP company would include project development activities, the operation of generating assets, plant construction activity (i.e. Engineering, Procurement and Construction (EPC), or Operation and Maintenance (O&M) & asset management services. These various activities have distinct value drivers and yield different risks. Development activities will look to capture a one-off development fee or capital gain following sale at the end of the development period to reward the high development risks; equity owners of operating assets will rely on a long-term stable and (mostly) low-risk cash flow stream; contracting activities will seek the extraction of a margin from one-to-three-year construction works and will require very specific technical expertise to be able to manage construction risks.
Multiples’ ranges, such as Enterprise Value (EV) / EBITDA, derived from trading stocks or past transactions can provide a first indication of a renewable energy company’s equity value after consolidated net debt is subtracted. However, this method typically hits certain limitations. As already mentioned, business models are not directly comparable, which therefore brings the benchmark exercise into question. Also, the EV / EBITDA multiple assumes that the profit & loss and EBITDA figures are reliable and reflect the company’s steady performance. However, year-on-year revenues and profitability can vary substantially between a pure developer that is focused on monetizing its projects’ portfolio by developing and selling them as a one-off at a point where it can maximize its sale price, and an IPP owner that develops and holds a long-term portfolio of stable cash-generating renewable energy assets.
Breaking it up with the “sum-of-parts” approach
To overcome these hurdles and adopt a consistent methodology, the typical valuation approach for downstream energy companies is to instead employ the “sum-of-parts” approach where the target company’s equity value represents the aggregated equity value of each of the business segments of the company. A specific valuation methodology within the distinct risk-adjusted cost of capital depending upon the underlying business and risk profile is applied to each of the considered business segments.
For assets under ownership and in operation, valuation will lie entirely with the future cash flows the assets will generate. Each asset in the portfolio will be valued using the discounted cash flow method. For that purpose, a cash flow model based on the projects’ specific commercial, technical, economic and financial parameters is established; forecasted free cash flows to equity are discounted using risk-adjusted cost of equity. Free cash flows to equity is the cash available to the equity’s shareholders after all operational expenses, taxes and project finance debt are paid. Cost of equity or discount rate is calculated using the Capital Pricing Model (CAPM) and is adjusted for the specific risks associated with the project to which the equity is exposed: e.g., country of operation, revenues’ exposure (i.e. Power Purchase Agreement (PPA), merchant etc.), foreign exchange risk, technology and others.
For the development business segment of an integrated IPP company, but also for a pure-play developer with barely any assets and solely focused on development activities, the corresponding value would come exclusively from the company’s development pipeline. As mentioned, the inherent strength of these companies is their ability to extract value from future project development. This is an intangible asset that is not cash flow generating (yet) from the date the company is valued but is based on historical and proven expertise in getting a future projects’ pipeline off the ground. Specific valuation methods for a pipeline must explicitly account for this and can be estimated using two distinct methodologies.
The “liquidation valuation” method utilizes “market pipeline multiples” expressed in [EUR/USD] per MW, and reflects each of the pipeline projects’ development status (i.e. early stage, mid-stage or ready-to-build), country of operation, risk profile or any other core factors. The more the pipeline project has reached development milestones, the higher its value per MW would be in a considered market. The pipeline’s value is then the sum of project sizes in MW times each of the project’s specific market multiple per MW.
If market pipeline multiples are not available, the “realization value” method can be used by weighting the project’s equity net present value with a realization probability. The project’s forecasted net cash-flows to equity are calculated using generic project-specific assumptions over the investment time horizon and discounted at a risk-adjusted cost of equity. The realization probability rate would be estimated based on the developer’s successful historical development track record, together with the project’s development status and a certain realization risk associated with the country of operation.
For these companies that are also involved in engineering and construction, the valuation of the EPC business segment will be determined by the cash generated by the actual contracted projects, and optionally with the potential value of the projects’ pipeline weighed with a reasonable discount factor for realization probability. The discounted cash flow method is utilized and the expected net cash flows from the already contracted projects are discounted using a typical cost of capital for the construction industry.
Renewable energy companies also have dedicated operation and maintenance and/or asset management activities for a project from which they extract additional fees. The value of the O&M business will therefore lie in the revenues generated by confirmed contracts, which provide good visibility of expected cash-flows. The potential pipeline could also be considered in the valuation but must be weighed with a reasonable discount factor to account for realization probability. The overall forecasted cash flows are then valued using the discounted cash flow to equity methodology and discounted at a cost of equity close to the expected return a project’s shareholder would have for the same project. Indeed, the ability of the O&M contract to be financially honored will depend on the capacity that the project can operate at and generate cash flows. Both risks’ exposures are therefore similar.
The environment for renewable energy corporate M&A is favorable: investment appetite in the field of renewable energy is strong, significant sector growth is expected for the next 30 years, the current companies’ landscape is rather fragmented and money is cheap. However, caution should be exercised when looking at potential opportunities: the “classic” corporate valuation methodologies at the level of the consolidated financials of the target company may be inadequate given the inherent diversified nature of renewable energy companies. More suitable is the “sum-of-parts” approach, where each of the company’s business activities is valued independently according to their respective value drivers and business risks. This approach is most likely to deliver an accurate value estimation to the transaction’s parties.
Apricum’s services in the M&A sector
Apricum offers a full range of transaction advisory services at the corporate and project level across a wide range of renewable energy sectors. Apricum’s experienced team brings deep financial, commercial and technical know-how with specific expertise in corporate and project M&A, and in project finance. To find out more about the growing M&A opportunities in the renewable energy sector, please contact Apricum Managing Partner Nikolai Dobrott.
 BNEF New Energy Outlook 2019
 Germany’s Renewable Energy Sources Act 2019, assuming cap on total PV installation is 52 GW.
 Spain’s National Energy & Climate Plan (NECP) 2030
 Italy’s National Energy & Climate Plan (NECP) 2030
 KPMG – European Power and Utilities Report Q1 2020
 BNEF New Energy Outlook 2019