What does the second half of the year hold for M&As in Chile’s energy sector?

That question is being asked in the context of an improved macroeconomic outlook and a reduction in political risk – and amid circumstances that could potentially spur divestments in the renewable energy space.

Electric power is an important M&A driver in Chile, accounting for 22% of transactions last year, second only to high technology (26%), according to a presentation by the Chilean office of professional services firm Deloitte.

Breakneck growth in renewables, particularly in the country’s sundrenched north, has outpaced grid expansion, a trend seen in other countries working to decarbonize. The fallout from transmission grid congestion is placing liquidity stress on some smaller generators with supply contracts that operate only in the renewables space, which raises the possibility of distressed M&A and sector consolidation. 

Marcela Chacón, research and business analyst at TTR Data, told BNamericas that the country could see an upward trend, “especially in purchase and sale transactions of non-essential assets for some companies that do not have the financial muscle to carry out expansion plans in the short term.”

One company has already been declared bankrupt and at least one other has formally said it would not be able to meet its payment obligations in the system.

Chile’s power generation player ecosystem has grown in lockstep with expansion of the country’s renewables park. Today, non-conventional renewable energy farms – chiefly wind and solar – account for 14.7GW, or around 43% of installed capacity. 

Renewables capacity has climbed apace over the past decade, spurred by regulated power supply auctions and the decarbonization push. 

Rodrigo Castillo Murillo, academic director of the master’s program in economic regulation at Universidad Adolfo Ibáñez, consultant and former executive director of local power distributor chamber Empresas Eléctricas, said there were concerns over possible consolidation and erosion of competition. 

In comments made to BNamericas for a two-part special investigation into the local power sector, he said that if the “insolvency of a large number of renewable companies were to materialize, or if they were forced to sell their assets before becoming insolvent, and since the natural candidates to buy those assets are the incumbent companies, a reconcentration would take place of the market, with all the adverse consequences that this has.”

Sector authorities claim that insolvency risks were "limited."

The executive secretary of Chile’s energy regulator CNE, Marco Antonio Mancilla, told BNamericas: “In recent times and only in some cases, a very limited percentage of contracted energy from companies that have solvency or liquidity problems has been verified. At the moment, we do not expect a substantial number of regulated supply contracts to face situations of insolvency.”

Future conditions, he added, "are expected to be more favorable."

According to industry sources, the problem mostly affects renewables companies with regulated power-purchase agreements, especially those whose generation plants are located in the north of the country. Several players and market observers fear the possibility of new insolvencies before the end of the year, especially in the case of small companies or those that have sought project finance. 

In terms of the largest companies or those that receive financing from their own shareholders or parent companies, they may suffer considerable losses that could lead them to seek to sell some assets in a worst-case scenario.

Chile’s government has published an energy transition agenda containing various supportive measures. The country’s renewables chamber Acera, however, has branded them “insufficient.”

OVERALL M&A

According to headline figures from TTR Data for January-April, 82 transactions were registered in Chile, up 6.49% year-on-year. Value, disclosed for around half of the deals, was down 66.4% to US$1.56bn.

April saw the smallest number of transactions in the past 12 months, “which indicates a period of uncertainty still exists for investors for the coming months,” Chacón said.

A brightening of the economic outlook and a forecast drop in inflation, combined with a reduction in political risk linked to the process to write a new constitution, may support an upswing in M&A and investment activity by the end of the year.

And notwithstanding disagreement over design, impact and speed, policy progress in central investment drivers energy and mining – positioned to benefit from local and global decarbonization efforts – is nevertheless being made.

During a recent M&A conference held by Deloitte, Edmundo Hermosilla, CEO of local group Dercorp and a former housing minister in the government of Eduardo Frei Ruiz-Tagle, said the time was ripe to enter, and forecast an uptick in dealmaking.   

Source: Business News Americas / BN Americas - Chile