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A Dealmaking Cure For the Power Industry: Reeling from its years of excess, the utility industry will leverage lots of acquisitions and restructurings to restore vigor and confidence.

Article Excerpt
Years of expansive moves into newly competitive markets and techniques fostered by deregulation such as trading have left the nation's largest electric utilities in tatters, beset by a credit crunch, by shock waves in the aftermath of the California wholesale market meltdown, and by the Enron Corp. debacle. But dealmakers looking past the multitude of problems and the massive loss of shareholder value believe that there is opportunity in the industry's dire state.

"The bad news in this industry is absolutely pervasive. It just seems like one piece of bad news after another," says David Dismukes, head of Louisiana State University's Center for Energy Studies, in summing up the industry's shell-shocked condition.

California's deregulation regime resulted in inflated electricity prices, blackouts, and the bankruptcy of one of the state's two largest public utilities. It could cost taxpayers as much as $40 billion. On top of that, premier energy trader Enron went bankrupt a year ago against a backdrop of accounting misstatements and other kinds of financial reporting irregularities, leading to criminal actions against some officials.

But despite this double whammy, an upside for the nation's electric utilities is that electricity sales are tied to general economic growth so that when the economy improves, experts believe, the country's electric utility industry will prosper. But until then, a key response to the industry's recent problems will be to sell assets.

"You can expect a long-term reshuffling of assets in the electric utility industry," says James Hendrickson, a partner in charge of energy m&a at Accenture. One area of dealmaking could be trading, which surged in prominence as deregulation of the industry - traditionally dominated by regulated, geographically focused monopolies - took hold in the 1990s.

Hendrickson says that the entire utilities industry is tarred by the collapse of the long-term speculative wholesale markets that stemmed, in large part, from the Enron implosion. The subsequent exit of other major traders in recent months such as Dynegy Inc. and Aquila Inc. is a symptom of the depth of the problems in the trading sector of the industry. "You are likely to see more acquisitions as strategic and private equity buyers break off selected pieces of companies," he notes, but adds that the problems in the speculative wholesale markets don't tell the whole story about the $350 billion electricity industry. If potential acquirers are willing to be more...

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