For the past few decades, the Ontario electricity distribution market has seen significant consolidation – with minimal changes to the process. Key aspects like rationale, deal process, and documentation have remained relatively unchanged; however, in the past ten years, we have noticed a shift in the following:
- Priorities – There is equal emphasis on innovation, customer impact and future proofing the entire organization, whereas in the past, the priority was solely financial gain.
- Regulatory impact – As a result of the changing OEB regulations and the downward pressure on rates and return on equity, there has been an increased requirement for additional financial analysis to ensure no harm to the ratepayers as well as an increased rationale towards diversification.
- Diversification – Many merger partners are looking for non-regulated capabilities, and/or increased financing capacity to be used for non-regulated opportunities/innovation. This has shifted a significant portion of the business plan focus towards other investment types and opportunities while still looking for synergies and rate compliance in the regulated business.
- Merger as the preferred transaction – Although mergers are typically more complex and costly, many municipal shareholders are trying to avoid both the loss of control over their communities’ power distribution as well as the higher transaction multiples associated with a straightforward acquisition.
Looking ahead, there is a favourable deal making outlook for local distribution companies (LDCs) in Ontario, both from a commercial and a regulatory perspective. We expect management teams and shareholders to continue to investigate the merits of a transaction given the potential benefits for each of their stakeholders while also expect the government to continue to look for ways to incentivize consolidation.
For the full article, please read our article in The Distributor. For questions or more information, reach out to Brent Jackson or Nathan Snowie of the Power & Utilities group at Grant Thornton: