Why is Brookfield doing so many M&A deals?

• Brookfield agrees $2.8bn acquisition of Duke's renewables arm
• Attractive pricing has driven a rush of M&A deals since early 2022
• The firm has been deploying capital from its $15bn transition fund

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Brookfield Renewables has agreed to pay $2.8bn to acquire the renewables arm of US utility Duke Energy. The deal is set to add 3.4GW of wind, solar and storage to Brookfield’s green energy portfolio when it closes, which is due later this year.

For Duke, this brings to an end a sales process that started last year. The utility is looking to restructure by selling its renewables assets in competitive unregulated markets, so it can focus on regulated markets where it is more dominant. You can find out more about the rationale for the deal in this analysis piece from last year.

Meanwhile, for Brookfield, this is the latest in a series of renewable and low-carbon energy merger and acquisition (M&A) deals that it has done since the start of 2022. The pace has been frenetic and there appears little chance of it slowing down.

In 2022, it paid $1bn for independent power producer Scout Clean Energy; $650m for solar and storage developer Urban Grid; and $540m for Standard Solar. It also paid $7.9bn for nuclear company Westinghouse in a deal alongside Cameco; and concluded the buyout of German solar firm Sunovis that it agreed in late 2021.

This has not slowed down in the first half of 2023. In March, a consortium led by Brookfield closed the $10.2bn acquisition of Australian utility Origin Energy, which also gave Brookfield a 20% stake in Octopus Energy. Brookfield has also agreed to buy KKR’s 50% stake in Spanish developer X-Elio; a controlling stake in the Indian firm CleanMax for $360m; and invested $1bn to help India’s Avaada Group to grow in the green hydrogen and ammonia sector. It is a wide-ranging global strategy.

And now the Duke buyout. Connor Teskey, chief executive of Brookfield Renewable, said the deal would boost Brookfield’s renewables pipeline and development skills: “We are… solidifying our position as one of the largest renewable energy businesses in the US, with almost 90,000MW of operating and development assets,” he said.

But why has Brookfield been so active in the last 18 months? And are there trends in the deals that show where it might pop up next?

Institutional interest

Teskey shed light on the Brookfield Renewable strategy during the company’s first-quarter earnings call last month. He said the company was doing deals in a range of low-carbon technologies – wind, solar, storage, nuclear, green fuels and more – as it sees they all have vital roles to play in the global net-zero transition. It makes sense to pursue a diversified strategy given the ongoing evolution of the energy sector.

The company has also benefited from the wall of institutional money that is looking to expand in the low-carbon energy space. Teskey said it had attracted “discretionary co-investment from some of the largest and most sophisticated investors around the world”. We have seen this in its strategy in two main ways.

First, in its deal for Origin Energy, Brookfield led the consortium with cash-rich state-backed partners the Government of Singapore Investment Corporation (GIC) and the Singaporean state-owned company Temasek. We are seeing state-backed investors looking to deploy their capital into the strategically important renewables sector.

And second, for its smaller deals, Brookfield has been able to deploy capital from its debut Global Transition Fund, which achieved a $15bn final close in June 2022. The fund is backed by institutional players including Ontario Teachers’ Pension Plan, PSP Investments and Temasek. Brookfield deployed some of these funds in its deals with Scout, Standard Solar, Sunovis and Urban Grid, as well as Origin; and also in tie-ups with storage firm Cambridge Power, carbon capture firm Entropy, and utility SSE.

Institutional demand for low-carbon energy shows no sign of slowing. Brookfield has said the first Global Transition Fund is now fully deployed, and it is looking to launch a second this year with a planned cap of $20bn. Brookfield is playing an important role in deploying institutional capital from other investors, not simply its own.

Finally, and perhaps most importantly, Teskey said the rush of deals since the start of 2022 was because there has been more opportunities to buy high-quality renewable energy developers in core markets at cheaper prices than in 2021. The volatility that has hit energy since Covid-19 and the Ukraine war has led to opportunities.

Teskey said the firm had “always just been very selective about finding opportunities that have the right value entry point”, but there had been more of these in the last 18 months. He said the company was particularly focused on companies that would be able to benefit from policy support, such as the Inflation Reduction Act in the US.

Major utilities may be able to take part in markets around the world, but there is still a host of smaller developers that are potential M&A targets.

However, Teskey’s most intriguing insight is how this focus is likely to change in 2023 and 2024. He said there has been less opportunity for it to invest growth capital into either operational assets or public companies, but this is changing.

Our interpretation is that investors have tended to favour development platforms over individual assets because there is less opportunity to add value to the latter; and that opportunities to find value in publicly-traded renewables firms have been hard to find in recent years due to high interest. Both may be changing due to market headwinds including inflation and supply chain challenges.

Teskey said: “We are seeing more opportunities in public markets today, potential public to privates. And then, for the first time in a few years, we’re beginning to see a number of very attractive opportunities to buy operating assets at very attractive value entry points. I would say that’s probably the biggest dynamic in what we’re seeing change in our pipeline.”

Institutional money will keep flowing, but it is likely to be in different directions.