Frankfurt An important area in investment banking is currently struggling with the most difficult market conditions. The prospects for lucrative mergers and acquisitions (M&A) have dimmed significantly as a result of the Ukraine war, the looming recession and rising interest rates. In the case of “mergers & acquisitions”, however, the number of “green deals” is growing, in which the corporations want to strengthen or reposition themselves from the point of view of sustainability.
Takeovers and mergers with an ESG reference have increased steadily in recent years, says Jens Kengelbach, senior partner at the Boston Consulting Group (BCG). ESG stands for environmental and social criteria as well as the principles of good corporate governance.
According to Kengelbach, green deals now account for 22 percent of all M&A activity. “In 2021, against the background of the climate crisis and the corona pandemic, there was another boost for such transactions,” says the expert in an interview with the Handelsblatt.
Despite the general restraint in the M&A business, there have recently been larger transactions worth billions in the “green deals”. The German energy giant RWE, for example, is strengthening its renewable energy business in the USA with an acquisition worth almost seven billion euros.
Top jobs of the day
Find the best jobs now and
be notified by email.
The group is buying the solar system developer and operator Con Edison Clean Energy Business from the regional supplier Con Edison from New York. With the takeover, RWE claims to have almost doubled its portfolio of wind, solar and battery storage systems in the USA and now has an installed capacity of 7.2 gigawatts (GW).
EnBW is currently looking for a buyer for a minority stake in its 900 MW He Dreiht wind farm, people familiar with the deal said. Indicative offers were received last month, with the transaction expected to be finalized by Christmas.
>> Read here: Global wealth will shrink again for the first time – 2022 as the turning point
“Cross-border deals add the most value, and there’s a learning curve for companies that make multiple acquisitions,” said Kengelbach, who heads BCG’s global M&A practice. Anyone who has threaded at least five transactions over time also increases the added value.
Transactions are also increasing because the war in Ukraine has made it even clearer that business models need to be restructured to make them more sustainable. However, the uncertainty about the onset of the economic downturn is also dampening the M&A business. Acquisition financing is much harder to come by, and it takes buyers and sellers more time to agree on prices.
“After a recession, it typically takes six to eight quarters before we reach the level from 2021 again,” says Kengelbach. “You will use more equity in the transactions and also see more recapitalizations.” M&A transactions are more attractive in a downturn or in a recession from the buyer’s point of view than in boom times. This is also due to the then lower ratings.
Green mergers and acquisitions bring additional returns
According to Kengelbach, the green deals also pay off for investors, and there is usually an excess return. “In the past 20 years, the ‘green deals’ – measured by the performance of the respective shares two years after the transaction – have performed around two and a half times as well as the papers after normal transactions,” says the manager.
According to the BCG analysis, better returns are also achieved when the business area or segment is acquired by a financial investor and not by a strategic buyer. One of the prominent examples of a green conversion of business models is the Danish company Orsted, which used to earn its money from coal and is now one of the leading providers of wind power.
The transformation succeeded through a whole series of acquisitions in the field of renewable energies. Since 2018, Orsted has made regular purchases on the global market, such as an offshore wind farm in Poland. The publicly traded company now generates around 90 percent of its revenue from green energy. “In the energy and automotive sectors, green deals are already the order of the day, but other industries such as the technology sector or the media and telecommunications sectors still have some catching up to do,” says Kengelbach.
Sunset assets can also be worthwhile
However, according to his assessment, there will also be buyers of so-called “sunset assets” who, for example, concentrate on buying up fossil business areas and parts of the group. This could be worthwhile in the period of transition to renewable energies. An investment banker in Frankfurt says: “There are financial investors who are definitely thinking about buying up such parts of the group because the prices seem attractive.”
>> Read here: Like global corporations like Microsoft, Apple and Co. siphon off wealth
For the global gas and oil industry, the consulting firm Kroll registered a total of 302 reported M&A transactions with a total volume of $50.6 billion in the second quarter of 2022 – and thus a decrease in transaction numbers of 25.2 percent compared to the extremely strong previous quarter .
Year-on-year, that was still an increase of 45 percent. Kroll expects companies to ramp up M&A activity in the second half of 2022. The reason for this is the high oil price compared to previous years, which could be reflected in higher transaction volumes. Investments by integrated oil companies in clean and renewable energies can also be expected.
More: Coal deal: Federal government plans exit by 2030 despite energy crisis.