August 2010

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Smart Grid Consolidates to Meet the Challenge
As major electrical giants begin to emerge from the recession, the number of acquisitions in the smart grid space is on the up, according to an executive brief from business intelligence provider Memoori.

Jim McHale


Jim McHale

Our findings based on the last six months research show that smart grid is attracting a lot more attention from investors and players alike and that it is rapidly becoming one of the most attractive areas of the Clean Tech business to invest in. One of the major reasons for this is it offers a less risky investment to both financers and players and that there is a growing trend by investors to move away from the highly capitalised sectors of the renewable market in favor of Smart Grid.

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Not all sectors of the smart grid are as capital intensive and as we have showed in previous reports, Smart Grid is just too big for the Utility Companies to finance and manage. It will therefore require some nurturing to overcome some of its growing pains. It will require the electrical utility industry to invest massive sums of money and while they may be able to justify this based on long-term projections; will they be able to find the money? It cannot be generated from cash flow alone and government subsidies are most unlikely to continue at their present generous level.

However, in the case of smart grid there is another solution, in the shape of the IT and communications companies. They will be more than willing to invest their capital and expertise in the smart grid information and communications infrastructure, as it should generate vast revenues from the plethora of value add services.

So if investors are ready to take the plunge what will they expect from the industry? They will judge performance based on business growth and how well players are developing all the business opportunities available to them.

Over the past six months, we have been collecting and analysing data on four benchmarks that play a major part in maximising industry performance. These are: merger and acquisition activity; forming alliances to share technologies and markets; attracting finance to invest in new products; and finally reviewing company financial performance. The results show that smart grid suppliers are working hard on all strategies that can deliver new business opportunities.

Industry Consolidation
This month alone we identified eight acquisitions by companies actively involved in the smart grid business. This is so far the largest number recorded in any single month since we started reporting six months ago. Since March we have identified 26 deals to the end of June this year. In the first two months of this year we noted 13 bringing the total to 39.

We have searched back to June 2007 and identified 23 significant acquisitions during the two and a half years to December 2009. While this will almost certainly have missed some major deals we think that these numbers provide sufficient evidence to show that there has been a significant trend in the growth of consolidation in the smart grid business during the last year and particularly in the last six months. In addition we can say for a business of this size and in its early stages of development the results show a significant and relatively high volume of acquisition transactions. This industry is definitely consolidating and producing stronger and more capable suppliers.

This month we identified eight alliance arrangements that have been formalised and this brings the total arrangements confirmed for the last three months to 28. For the first three months of the year we identified 21 arrangements bringing the total to 49 for the first six months of the year. We regard these numbers as relatively high compared with similar but larger electrical businesses showing that the smart grid industry is working hard to maximise business opportunities.

In the first six months of this year we also identified 46 private funding arrangements with almost 60% of this taking place in the last three months. We believe that this number is relatively high compared with similar businesses in the electrical sector but is well down on deals in some other areas of clean tech business. However, it is buoyant and growing and it bodes well for the future. It is yet another factor that shows how companies are exploring all opportunities to develop their smart grid business.

Finally, we also assessed the financial performance of players in the business. The financial reports from Itron, Landis & Gyr, Sensus and EnerNoc show increased revenues and profitability. Smaller specialist suppliers such as Comverge, Acorn and Tollgrade have increased their revenues, but not particularly profitably.

[an error occurred while processing this directive] Major electrical manufacturers such as 3W Power Holdings and AEG Power Solutions, who provide more of a bell weather for the fortunes of the electrical transmission and distribution industry, turned in a poor performance in 2009. The former had Q1 revenue and profit down year on year by 50% and 90%, respectively, reflecting the late cyclicality of business operations.

Order backlogs
However, they are more optimistic about the future with an order backlog at the end of Q1 2010 standing at €188m which is 37% higher than compared to the end of Q1 2009. Similarly ABB reported a decline in orders in 2009 of 19% (13% in local currencies) compared to 2008, due to the global economic downturn which has significantly weakened demand, particularly in the industrial and construction related markets and price erosion in both utilities and industrial sectors in many geographical markets.

The only trend that we can confirm from these financial results is that specialist companies serving the AMI sectors are performing very well and are optimistic about future prospects. Smaller and less well established specialists are growing but not yet profitably, but again are forecasting much better returns for 2010.

The message that the major electrical giants are delivering is that they have hit the bottom of the trough and that the second half of 2010 will see increased revenues. The good news is that the cycle looks about to go into an upturn this year and smart grid will also benefit in the US from the additional flow of business from the smart grid stimulus funding program. The smart grid business is robust, performing well and in good shape and is an attractive proposition to invest in.

About the Author

Jim McHale founded Memoori in 2008 to provide competitive intelligence, market awareness and financial deal tracking services to companies across several industries. Before Memoori, Jim worked as a Business Analyst for i&i Proplan Ltd researching international building controls markets and providing assistance to client’s strategic marketing and acquisition decisions. Jim has completed market research and analysis assignments in India, Western & Eastern Europe and Asia, on subjects including Electronic Security Systems and Fire Detection Systems in Buildings. In 2005, he co-authored the report "IT Convergence in Buildings", focused on the growing market for Intelligent Buildings.


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