How can energy entrepreneurs utilise M&A opportunities?

The ongoing energy transition, which reflects the shift from a reliance on fossil-based energy production to renewable energy sources, is fueling increased M&A activity in the energy sector. Despite challenging geopolitical and economic circumstances, M&A activity rebounded to pre-pandemic levels across the chemicals, oils and gas, power and utilities sectors in 2022. 

The factors driving increased activity

M&A is being used to diversify portfolios and reconfigure assets as businesses seek ways to futureproof their operations, as well as meet carbon reduction targets. This means that businesses owners are looking to restructure by acquiring innovative businesses in the renewable space which are driving the energy transition and will provide them with the capabilities for long-term sustainability. In contrast, companies are selling off assets that no longer align with their future vision. 

Increased deal activity is also driven by pursuit of supply chain resilience and energy security amidst ongoing uncertainty. As focus sharpens on the need for the UK to reduce its reliance on fossil fuels and improve energy independence, sustainability has shifted even higher up the priority list for shareholders and consumers alike. As a result, appetite for investment in green energy, such as biofuels, electric vehicle infrastructure, renewables, and hydrogen, is ever-increasing. 

Private equity interest in the space continues to grow, with aggregate deal value for renewable energy companies soaring from $633.9 million to $5.51 billion over the whole of 2021. Amidst soaring energy prices, renewable energy has become an even more attractive target for private equity funds and there are opportunities to acquire oil and gas assets at a lower price as businesses reconfigure portfolios for the energy transition.  

This changing landscape leads to increased opportunities for entrepreneurs looking to buy businesses that align with the transition and for the owners of those businesses to utilise the shift to make a sale. Big players in the sector are keen to acquire small to mid-size companies to remain competitive, enter new markets and accelerate growth. As a result, these business owners are in a good position to consider a sale. 

To take full advantage of the opportunities available, business owners need to ensure that they have resilient deal-making capabilities in place and have prepared their business, and themselves, to entice buyers and execute a successful deal in this rapidly changing dealmaking environment. For buyers, detailed due diligence and alignment of strategic vision is vital to ensuring that a business will be a valuable addition. 

Ensure vision alignment 

With energy businesses seeking to converge into different sectors, such as those in the oil and gas industry securing assets in the renewable energy space, it’s important to consider how these will align. Acquiring a business in a different sector could result in less natural synergies so it’s vital to consider how the new asset will be integrated into the existing business and portfolio. 

In addition, business leaders need to ensure that the company aligns with its vision for the future and the direction of the industry - acquiring a business reliant on fossil fuels is not going to accelerate participation in the energy transition. In this rapidly changing environment, companies need to frequently review assets to ensure strategic alignment with the business’s goals and be prepared to invest in those that enhance green operations and divest those that do not. 

Vision alignment was particually important in a recent energy sector deal completed by Marktlink. Zonnemarkt Groep, a specialist in the supply and installation of solar power systems, was seeking a partner to take in all 16 of its entities, ensure they were aligned and had shared objectives. The group selected Green & Durable Group as a partner, a pioneer of sustainable energy solutions, to enable them to offer full-service solutions in the renewable energy space and utilise its extensive network for growth in line with future strategy.

Be prepared for detailed due diligence  

Energy business owners looking to acquire another company will carry out extensive due diligence to ensure that know what they’re buying, the obligations that will be assumed and any associated risks. 

Sellers need to ensure that they are prepared to be scrutinised and are able to satisfy the buyer’s due diligence process. This will place significant strain on the time and resource of the management team, meaning that it’s crucial to strike a balance between ensuring the interests of the company are upheld and responding to due diligence requests. Business owners need to ensure that they can deliver required documents quickly and efficiently, ensuring financial statements are in order and projections are defensible. Any issues that might arise should be anticipated and rectified at the earliest possible opportunity. Often, an online data room is set up by the business to house all of the information required. 

It’s vital that a potential buyer incorporates ESG into the due diligence process to understand the value of the target business and allow for any costs associated with aligning the business with the ESG strategy of the existing one. 

Work with an M&A adviser 

It’s advisable to work with a specialist M&A adviser on any deal to ensure its successful execution. Energy entrepreneurs should ensure that they chose an adviser with sector specific experience, allowing them to utilise their network of potential buyers and sellers and be reassured that they have the necessary knowledge to advise on an energy deal. 

An adviser works across the entire transaction journey, helping to secure optimal deal terms, evaluate synergies, articulate responses to due diligence requests, assist in negotiations and advise on regulation and risk. Preparation is key when buying or selling a business, but it’s also extremely time consuming. An adviser can help to reduce the burden of M&A activity on the management team, ensuring they’re able to focus adequate attention on the smooth running of the business. 

Leverage the competitive environment 

Finally, business leaders should ensure that they utilise the competitive environment in the sector to secure the best possible deal. A process that involves multiple potential bidders is likely to result in a higher acquisition price and better deal terms. In order to increase the likelihood of this, business owners could consider running the deal process as an auction. 

As major players in the energy sector look to diversify portfolios, increase value chain proposition, invest in disruptive technology and strengthen ESG assets, businesses which can provide them with the opportunities to do so are in a good place to negotiate a successful deal. With the right processes and support mechanisms in place, the energy transition provides an abundance of opportunities for energy entrepreneurs.