Wottrich Quoted by MergerMarket

Fukushima Daiichi Nuclear Power Plant

April 15, 2011 – MergerMarket

Japan’s ongoing crisis will lead to a major reshuffling of energy assets, M&A

MergerMarket Proprietary Intelligence

  • Government may broker consortium alliance deals with foreign groups for TEPCO
  • Recovery efforts may also lead to M&A transactions
  • Alternative energy may see fewer subsidies due to inflation, diminished savings

A major reshuffling of energy assets in Japan is likely to occur following a thorough analysis of the nation’s power industry, according to industry sources and analysts. Such moves will also include significant M&A transactions, they said.

Richard L. Wottrich, Senior Managing Director of the International Desk specializing in cross-border M&A at The McLean Group, a private Virginia headquartered investment bank, said that “a complete analysis of the entire Japanese power industry will no doubt be instituted, which will result in a probable major reshuffling of power assets. This may lead to significant M&A transactions.”

For one, the Japanese government will either take over Tokyo Electric Power Co. (TEPCO), which may result in its break-up, or broker consortium alliance deals with other major power groups – even out-of-country groups, he noted.

One Japan-based banker told this publication that he was researching TEPCO with a view to eventually pitching for potential break-up targets. He mentioned Kandenko, which is 46.2% owned by TEPCO and provides electricity transmission and distribution services, as one plausible candidate. Another is the utility’s IT businesses, he said. TEPCO owns two information and telecoms businesses: 81.2% owned AT Tokyo Corp. and 100% owned TEPCO Systems Corp.

At the same time, recovery efforts stemming from the 11 March disaster may also lead to M&A transactions designated to accelerate and facilitate the rebuilding of Japan, Wottrich said.

As an example, Japanese construction company JS Group has said it will consider domestic M&A as a means to optimize production and to meet recovery demands following the Eastern Japan earthquake.

Going forward, Japan has a very real energy crisis in the short term in replacing electricity produced at the Fukushima Daiichi Nuclear Power Plant, Wottrich said.

There will be a shortfall of roughly 11% nationally in electric power rolling into the higher temperature summer months, which will impact Tokyo especially. “The government will spearhead immediate deals in energy working with major Japanese firms to help solve this problem. By necessity these deals will tend to be in traditional oil, coal and gas sectors that feed the existing power grid in Japan,” he said.

CLSA regional head of oil gas analysis David Hewitt previously told this news service that in the mid-term, the nuclear crisis would lead to the substitution of LNG from nuclear energy. Gas could move from 13% to 20% of the primary energy mix by 2020, he had commented. Primary sources for this additional

LNG will be Qatar and various Australian projects that will also sell small equity stakes in return for offtake agreements, he noted.

Prior to the earthquake, Penn Bowers, an analyst following TEPCO, had noted that the nuclear power operator and Japan in general was “oversupplied” in terms of LNG. Going forward, however, companies such as Mitsubishi, Tokyo Gas, and Osaka Gas should be interested in buying LNG from Inpex’s Ichthys project, he said.

Unconventional oil and gas has made recent headlines for interest from Asian buyers. Bowers said that in particular, trading conglomerate Marubeni had expressed a great deal of interest in shale gas and shale oil. Last week, Marubeni announced its USD 270m purchase of a 30% stake in Texas-based Marathon Oil’s shale oil project.

Meanwhile, clean energy has been viewed with renewed interest as a result of anti-nuclear sentiment. People will be expecting more renewable energy sources going forward, an industry source said. They are more confident about investing in clean energy companies following the nuclear incident, he added.

However, Wottrich noted that alternative energy will see fewer subsidies as a result of diminished savings and accelerated inflation globally. “As the recession slowly recedes, big government expenditures by debt-laden developed economies will slow, putting pressure on alternative energy to be competitive,” he said, noting that the Japanese government in particular will have to print money to pay for the huge 11 March earthquake and tsunami disaster.

Nuclear power is too important a source of energy today to be abandoned, Wottrich said. “The disaster in Japan should prompt advances in nuclear power safety long term, which will increase expenditures in the space. Uranium ore pricing will follow these trends,” he said.

by Mai Mizuta and Geoff Spiteri