Subject: Clean Energy M&A: Six Trends to Watch
From: "Eric Schwerin" <[email-masked]>
To: "Hunter Biden" <[email-masked]>, <[email-masked]>, "Neil Callahan" <[email-masked]>
Date: Thu, 6 May 2010 18:48:29 -0400

Clean Energy M&A: Six Trends to Watch
Many companies will get bought this year: is yours next?

When all is said and done, clean energy M&A activity is going to be one of the big stories of 2010.

Recently, United Technology acquired 49.5 percent of Clipper Windpower, while Siemens purchased of Solel Solar Systems to move into solar thermal power plants. Areva, the French giant mostly known for nuclear power, snapped up solar thermal manufacturer Ausra.

Indeed, there are three main reasons we believe that in coming quarters the size of the average clean energy M&A transaction will grow. First, upstream solar players from around the world will continue purchasing downstream players. Second, the wind power segment will continue on its vertical and global path. And third, the solid and steady consolidation we've been seeing in the smart grid space will simply continue

From our perspective, there are six major opportunities in clean energy M&A that bear watching as the last three quarters of 2010 unfold.

Wind

Integration is the watchword in the wind power segment right now. Large conglomerates and turbine OEMs are being forced to verticalize their supply chain through organic and inorganic means and, through this effort, they are seeing M&A growth opportunities with software/IT systems providers and O&M services companies that offer proprietary solutions or access to key markets or customers. Additionally, we are seeing sub-component suppliers aggregating or being verticalized into the larger OEMs. 

In order for sub-component suppliers to attract larger players in the market they will need to deliver consistent high-quality standards, product performance and reliability. It is very costly and logistically challenging to ship certain components (tower, gear boxes, blades, etc.) across long distances throughout the world; not surprisingly, we are seeing the most M&A transaction activity in these areas. To date, northern European nations have led the global deployment of wind technologies and markets. But a new paradigm is occurring in which North America and Asia are driving future growth in the on-shore wind markets.

The other externality is the current commercialization of offshore markets across the globe, which is deepening the need for consistent part performance and technology development from a sophisticated global supplier base.

Solar

There have been many solar M&A deals in recent quarters, and not all of them will prove to be winners. And, if there's another economic reversal in North America and Europe, things could get especially messy. But there's lots of interesting technology being developed in solar, and the move toward utility-scale deployments is important, as large corporate acquirers are beginning to take positions in this market. Highlighting this trend are two recent deals involving Siemens-Solel and Areva-Ausra.

The real dynamic in solar right now, however, is two-fold: technology providers are looking to sell their companies because they know everyone can't succeed in the space and they want to exit with decent valuations on the promise of future returns (as opposed to actually having to deliver on these expectations and potentially being disappointed in actual outcomes); and upstream players will keep buying their downstream counterparts to ensure access to end markets.

Smart Grid

There's a lot of hype and froth in this segment today, so the challenge is seeing and acting on the real opportunities that are definitely out there. There are clear category winners like Silver Spring Networks, but all the giants are piling into Smart Grid -- from Cisco to IBM to ABB to GE -- and that makes it hard for the smaller and more nimble firms to flourish, especially when dealing with more conservative utility buyers. As a result, we expect that the titans will acquire many of these smaller players in the coming year or so. After that, we believe the market will settle down for a few years before the next M&A window opens up in this space.

Energy Storage

This segment is as hot as any other in the clean energy marketplace. There's a growing realization that renewable energy is coming online, but integrating it into the grid is extremely challenging without the right type of energy storage technologies and systems in place. The real issues are the intermittent nature of renewables like solar and wind, as well as the need for time-shifting, so that energy can be captured for later use during expensive peak periods. In short, getting energy demand and energy supply aligned is the Holy Grail here. Unfortunately, the innovative companies in this space are still emerging, so M&A activity will likely be muted to opportunistic for the next year or so.

Energy Efficiency

Achieving commercial industrial efficiencies makes this a very interesting and intriguing market segment. There is a large services component in this segment (outside of pure solid-state lighting, systems automation and other deep technology plays); this means that these companies are more palatable to traditional corporate buyers, who can't always justify "paying up" for unproven technology companies. As a result, we see this category as potentially exciting from an M&A standpoint. The bottom line is that there are real businesses in the world of energy efficiency. There are also big players, like the ESCOs, that are looking to make the right kind of growth-enhancing acquisitions. 

Water

Water is the source of many pain points throughout the world and, as a result, it represents a big opportunity for companies that can harness technology to solve problems and end suffering. From a structural point of view, the water category is dominated by massive global monopolies, so small firms in the space that address the right issues with new approaches stand a very good chance of being acquired by the hefty and hulking oligopolies. Desalination technology is an especially significant area that is worthy of note, and Asia and the Middle East are both fertile areas for innovative players.

Clean energy and clean water are two of the most critical 21st century needs of our global society, and the private sector -- often working in conjunction with the public sector -- is now starting to realize and fulfill those needs. Looking ahead, we believe that one of the biggest catalysts in this endeavor will be brisk M&A activity, because it brings the best and brightest companies in the market together more quickly. Based on our forecast, 2010 should be the year that kicks off this M&A trend.

***

Jamie Boyd is Senior Vice President and a leader of the sustainable industries group at Cascadia Capital, LLC, a national investment bank based in Seattle that focuses on financing the future for companies in sustainable industries.

Eric D. Schwerin
Rosemont Seneca Partners, LLC
1010 Wisconsin Ave., NW
Suite 705
Washington, DC 20007
(202) 333-1880
[email-masked]
P Consider the environment before printing this email.