New analysis from Ernst & Young suggests that the re-emergence of natural gas as the preferred fuel source for power generation is having a significant knock-on effect for power and utilities mergers and acquisitions activity.

According to Ernst & Young’s Power Transactions and Trends report, the combination of continued economic uncertainty, tightening financial markets and disparity in global gas pricing has resulted in Q1 2012 total deal volume falling 30 per cent from Q4 2011 and a 16 per cent drop in corporate deal volumes year-on-year.

“The continued decline in natural gas prices in the US remains one of the sectors most talked about issues and is having far reaching effects,” said Joseph Fontana, Ernst & Young Global Transaction Advisory Power and Utilities Leader. “We are yet to see the full impact from an M&A perspective, however we expect this to change in the remainder of 2012 as companies seek to position themselves, particularly in the US, for sustained low prices and abundant supply.”

Q1 2012 saw a value decline of 55 per cent year-on-year, primarily due to the sharp decrease in M&A activity led by slow economic recovery. However, recent activity in the generation segment bucked the downward trend and increased total Q1 2012 deal value by 20 per cent over Q4 2011 reaching $26 billion, with generation contributing 63 per cent of global deal value. This is largely due to GDF Suez’s $10.1 billion amended offer for the remaining equity in International Power Plc.

Europe continued to shape the global power and utilities M&A landscape during Q1 2012, accounting for 48 per cent of deal volume and 71 per cent of deal value, through domestic privatization and asset disposal programmes. The Eurozone debt crisis and its impact on the power and utilities sector remained central to M&A decisions, with dealmakers balancing financial discipline, consolidation in core markets and the need to gain traction in higher growth emerging markets.

Looking forward, Fontana comments, “While fiscal tightening by European banks might restrict future M&A activity, the growing number of asset disposal programs by European utilities and government privatization programmes is expected to drive deal flow in the short term. We also expect significant activity in Latin America, particularly Columbia, Brazil, and Chile, reflecting strong underlying economic growth and restricted access to credit forcing M&A to be top of mind.”