After a busy few years of consolidation in Europe, utilities and other investors in power, gas and renewables are set for a quiet year — at least when it comes to M&A.

With financial and commodity markets in turmoil and both company and asset valuations going haywire as a result, industry experts say deal flow could significantly slow down over the coming months. Some large sales processes are already being delayed and a prolonged crisis could also hamper the steady sales of power plant portfolios and even large-scale takeovers, as utilities focus on maintaining critical infrastructure and financial and other investors re-evaluate potential transactions.

"It wouldn't be surprising to see parties holding back amid all this volatility," said Stephen Jennings, head of energy and natural resources at Japanese bank MUFG in London.

With share prices tumbling and capital markets getting tighter, utilities have already cut spending and even started to scrap their dividends to preserve cash. Other investors are also more likely to take up a wait-and-see approach, advisers said, since nobody is sure how long the crisis will last.

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"There's a drain on resource in terms of looking at your existing portfolio," said Chris Staples, a corporate partner at law firm Linklaters and co-head of the firm's global commodities group. Seemingly smaller issues could also become a problem, he added.

"When you're trying to do a deal, there are times where a face-to-face meeting makes all the difference," Staples said.

Looking at deal closings in recent weeks, observers could be forgiven for thinking nothing is amiss. Utility E.ON SE recently sold off its heating power business to a smaller rival in Germany, while Solarcentury managed to find a buyer for its residential solar business. Infrastructure funds have also continued to rotate assets, with Glennmont Partners and Ardian announcing deals for renewable plants in Portugal and Finland, respectively.

But during the first three months of 2020, deals captured by S&P Global Market Intelligence in the utility and power generation sector already hit their lowest point for any first quarter since 2015. This includes transactions for both assets and companies where the seller, buyer or target were located in developed Europe.

Many companies are currently coping with momentous changes to their workforce, but those in the power and gas sector also need to ensure their critical infrastructure keeps running — from power generation to network distribution and consumer supply. Add to that the financial impact of reduced power demand and lower prices, and many other objectives have simply been pushed aside.

"We're not spending a massive amount of time on M&A at the moment, as you would imagine," Henrik Poulsen, CEO of Danish utility Ørsted A/S, told investors on a March 25 conference call.

Lower prices for electricity are also putting pressure on power plants that rely on wholesale rates for part of their revenue, which could depress market activity for generation assets, including unsubsidized renewables. In addition, assets that are not yet operational are suffering under supply chain disruptions and construction halts, while new financings may be on hold, especially for developers who typically rely on cheap debt.

"Valuations are going in all directions, so it's hard to assess [anything] in the current context," said Pierre Georges, a senior director and the sector lead for European utilities at S&P Global Ratings.

Pressing pause

Given the lead time for transactions and the fact that companies have only been dealing with mandatory quarantines for a few weeks, some say the real impact of the coronavirus on M&A will only be felt over the coming months. Deal activity typically picks up later in the year.

"It will be in Q2 onwards where you start to see the slowdown manifest itself," said Jennings, adding that banks like MUFG will prioritize deals for their core clients in the coming months.

Adrian Scholtz, partner and head of renewables at KPMG in London, agreed that plenty of deals already in the works before the crisis are moving along. New processes are much less likely to launch while the current level of uncertainty persists, however.

"There's still good momentum and we've seen many deals continuing," Scholtz said. "[But] fewer buyers may be able to run the slide rule over new opportunities at the moment."

In fact, some large transactions have already been put on hold. Centrica PLC said April 2 that it is pausing the sale of both Spirit Energy Ltd., its upstream oil and gas joint venture, and its 20% stake in the U.K.'s fleet of nuclear power plants. The company still plans to pursue both divestments, which were originally planned to close this year, but said it wants to wait until financial and commodity markets have settled down.

Other companies were also targeting to shed some weight. E.ON needs to divest additional businesses, including retail operations in Hungary and the Czech Republic, to satisfy conditions for EU approval of its mega-merger with innogy SE. And Finland's Fortum Oyj is looking to possibly sell off its remaining district heating business in Poland, the Baltics and Finland. Analysts at Berenberg said in March that they expect the utility could even be looking to put majority-owned Uniper SE's gas-fired power plants on the block.

"There were quite a lot of small to medium-size pieces that needed to be sold this year," said Ratings' Georges, adding that he had been expecting high activity for deals up to a volume of €1.5 billion in 2020. E.ON and Fortum declined to comment.

On the other side, France's Engie SA has likely been on the lookout for more smaller players it can gobble up to expand its energy services business, where it has pursued a steady clip of bolt-on acquisitions in recent years.

Olivier Biancarelli, the executive in charge of the customer solutions division, said in November 2019 that Engie plans to spend €2.5 billion on M&A related to the business line in the three years to 2021. At the time, Engie had already invested about €700 million, including to acquire Conti LLC, a U.S.-based construction company. Now Engie is also facing a significant slowdown in new orders for its services division, with lockdowns in place in many of its markets. Engie did not respond to a request for comment.

Some equity analysts, including at Goldman Sachs and Berenberg, have even pointed to major utilities like RWE AG, SSE PLC and EDP - Energias de Portugal SA, as well as struggling Centrica, as attractive takeover targets in the sector.

Moving picture

While blockbuster deals are perhaps less likely in the current environment, analysts and advisers expect deal activity to pick up pace as soon as the economic consequences of the pandemic come into clearer focus and commodity prices start to stabilize.

Some even think there could be a wave of M&A after the dust has settled, with delayed transactions back on the table and an opportunity to strike deals for distressed companies. Ørsted's Poulsen said some developers could be looking for a "safe harbor" after the crisis and pointed out that his company would have the balance sheet to strike if any opportunities come up.

In the long run, oil and gas majors, as well as the pension funds and other financial players that have built up a large presence in Europe's renewables industry, are also expected to drive increasing consolidation, driven by sustainability concerns among their investors.

Large integrated oil companies had been on a spending spree in the power and renewables space but are now dealing with a double whammy in the form of the coronavirus fallout and an oil price shock. Still, KPMG's Scholtz said he is even now continuing to have discussions with large corporates, including in oil and gas, on deals in the new energy space.

"They're looking to continue their drive," he said. "Whether they can write a billion-dollar check tomorrow — that may be difficult. But the momentum definitely has not stopped."