Infra deal value drops 50% in Q3

While deal numbers were up from 10 to 13 during the period, efforts to deploy dry powder remain frustrated by the shortage of assets coming to market.

The value of deals targeting infrastructure and utilities decreased by more than 50 percent in the three months to October, according to a study by Allen & Overy.

The law firm’s M&A index, which tracks global transactions of at least $100 million, found that deal value fell from $19.7 billion in Q2 2013 to $9.6 billion in the third quarter. This was despite an increase in the volume of transactions, which grew from 10 to 13.

The geographic breakdown did not provide a more reassuring picture. Close to 30 percent of global deal activity involved Chinese targets and Chinese companies – a rare occurrence historically.

“Chinese targets don’t normally feature that prominently in the league tables. This shows how quiet a quarter it’s been in other parts of the world,” said Sara Pickersgill, a partner at Allen & Overy, during an interview with Infrastructure Investor.

If transactions involving Chinese targets were to be stripped out from Q3, deal levels would be at their lowest level since 2008, the study showed. Activity was particularly subdued in Europe, where a shortage of assets coming to market was seen as the main reason for the lack of transactions.

Activity also slowed down on the energy front. The sector, which the study did not include in the infrastructure category, saw deal value decrease from $62.8 billion to $59.5 billion – a 5 percent drop.

Yet the study cautioned against excessive pessimism. Put in perspective, the trend did not look too negative: compared with the same period last year, total deal value during the first nine months of 2013 was up 45 percent. With relatively strong activity in Q1, the market seemed well positioned to end the year on a strong note, Pickersgill said.

“There is clearly no lack of demand. Fundraising is still going apace, with more institutional investors increasing allocations, so there is a lot of capital to deploy.”

The M&A index also expected more assets to come to market in the coming months. The first wave of infrastructure-specific funds was soon coming to the realisation phase, while a number of strategics were looking to divest non-core operations.

That would likely trigger a fresh flow of M&A transactions, Pickersgill suggested. For example, she expected Heathrow Airport Holdings to be launching a sale process for Aberdeen, Glasgow and Southampton airports in the next six to 12 months.

If anything, Pickersgill thought, the shortage of targets would encourage potential acquirers to venture away from their core markets. “As a result of a larger amount of capital pursuing a shortening supply in Europe, we’re seeing willingness from infrastructure investors to look at a wider range of assets. A number of them are looking at assets in the energy and transmission sectors, for example, while others are setting up operations outside Europe.”