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Report: Three Recent Fundamental Changes in Retail Energy M&A
September 18, 2024
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The following is a report from Preston Ochsner of Ochsner Interests Inc. EnergyChoiceMatters.com disclaims any responsibility for the content or data contained in the news release. Any views expressed in the report may not necessarily reflect the view of EnergyChoiceMatters.com
Three Recent Fundamental Changes in Retail Energy M&A
To be successful in the retail energy market, you must be agile. However, when it comes to mergers and acquisitions (M&A), success demands more than agility; it requires the ability to see past what large providers are doing today and anticipate what they are building toward in the future.
Here are the three recent fundamental changes in retail energy M&A that CEOs and owners should be aware of.
#1. Four of the top five largest providers shy away from deals under 100,000 RCEs
Two years ago, the top five largest providers in the US would price deals as small as 20,000 residential customer equivalents (“RCEs”). Today, four of those providers will typically only consider deals over 100,000 RCEs.
The two main reasons for this change are:
1. Significant acquisitions have reduced the need and appetite for other smaller acquisitions. For example, Vistra closed its $6.8 billion deal with Energy Harbor on March 1, 2024.1
2. The market has been flooded with potential deals that do not close or have minimal value.
Even at a minimum threshold of 100,000 RCEs, the deal needs a strong brand, a unique niche, or excellent positioning to get an attractive valuation, meaning M&A deals are far more scrutinized than in years past. This creates an opportunity for companies like Eligo Energy in the market for deals well below this threshold.
#2. Private equity is now aggressively pursuing ABCs with an annual EBITDA of $500,000 or more
Private equity (“PE”) generally avoids small- to medium-sized retail energy providers (“REPs”) and targets aggregators, brokers, and consultants (“ABCs”).2 The change is in how PE values those ABCs.
Compared to just a year or two ago, there’s been a significant jump in required EBITDA multiples to be considered for a deal.
We have recently seen EBITDA multiples up to eight times the trailing twelve-month results. The main reason for this change is that the supply of ABCs with that much EBITDA has decreased significantly due to M&A while the demand has stayed the same.
#3. The buyer pool has split between those who love natural gas and those who hate it.
Natural gas is becoming a polarizing negotiation topic. For example, in January 2024, Ochsner Interests brought a considerable power and gas REP deal to the market. We showed it to all five largest providers and several others.
One of the top five providers wanted just the gas business, and another wanted just the power business. This was the first time we had ever seen that happen.
Not wanting the gas business was due to a corporate mandate to reduce carbon emissions. It emphasizes how critical it has become to position the seller and structure deals.
The retail energy M&A market is constantly evolving. One reason Ochsner Interests has closed 100% of its deals in the last year is that we’re keeping careful watch over these and other trends that dictate the success of our clients.
1 https://investor.vistracorp.com/2024-03-01-Vistra-Completes-Energy-Harbor-Acquisition
2 Notable exceptions include Gainline Capital Partners and True Green Capital Management
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