Bhavin Zaveri

Drivers of M&A Activity in the Wind Energy Industry

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September 2009
Background

Increasing demand and depleting reserves in energy resources like oil, gas and coal have
led to a substantial increase in their respective prices. Coupled with the effects of CO2
emission and global warming, this has prompted consumers and policy makers around the
globe looking for alternate sources of energy. The power sector worldwide is the single
largest source of emissions, accounting for about 40% of CO2 emissions, and 25% of overall
emissions 1. As per the Kyoto Protocol, achieving an ambitious target of reduction in
emissions by 25-40 % below 1990 levels by year 2020 2 will require the power sector in
industrialised countries to manage their energy more efficiently by possibly switching to
renewable sources of power like solar and wind power. While the solar industry is still in a
very nascent stage, the wind power industry has seen tremendous growth over the past
decade.

The growth in this industry has been pioneered by some global giants like GE, Vestas,
Gamesa and of late Suzlon Energy, India. Technological advancement in the later years of
the twentieth century along with regulatory support has provided a strong impetus for the
growth of this industry. In addition, like all other industries, a common mechanism aiding the
industry growth and consolidation has been mergers and acquisitions activity, both at a
financial level and an operational level.

The M&A activity in this industry has seen a rapid growth over the past decade. According to
a research conducted by PwC, the wind power industry has seen a total of 94 deals valued
at US$ 24 Bn in the year 2007. This constituted 55% of the total deal value of US$ 43.4 Bn
for all the Renewables 3 deals combined. The year 2008 has seen the value of deals go
down to about US$ 15.3 Bn due to lack of available credit and a worldwide financial crisis,
but the number of deals has remained the same at 94 and the share of deals in the wind
power industry in the total renewable energy space has gone up to 57% from 55% in 2007
(PwC).

Global Wind Energy Industry

The global market for wind power has grown faster than that for any other source of
renewable energy. The total installed capacity of wind power has increased almost twenty-
fold from just 6.1 GW in 1996 to 120.8 GW in 2008 (Figure 1).

1
http://www.gwec.net/index.php?id=151
2
GWEC, Global Wind Report 2008, http://www.gwec.net/index.php?id=103
3
All Renewables include Wind, Solar, Biofuels, Geothermal, Fuel Cells and Hydro

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 Figure 1: Cumulative Capacity of Wind Power Worldwide
Source: GWEC

This remarkable growth is attributed to three main factors technological advancement and
active interest on part of large firms backed by investment banks, expansion of the market
beyond its original base in Europe to the USA as well as developing countries like India and
China and finally, the pressure applied by national and state governments in the form of
incentives and quotas.

The turbine manufacturers market at the

end of 2008 is dominated by 5 major players
with Vestas of Denmark leading the pie at
19.8% followed by GE at 18.6%. The top 10
manufacturers as of 2008 and their
respective market share are as exhibited in
the adjoining figure. Following the
acquisition of REpower in 2009, the position
of Suzlon would climb up to the third place,
Figure 2: Wind Turbine World Market Share as of
just above Gamesa. December 31, 2008

Among independent power producers or wind farm operators, the notable ones include
Airtricity, Horizon, Enerfin, Trinergy, EnXco, Clipper, Germania Windpark and Invenergy; and
notable integrated energy companies include Shell, BP, Edison Mission, PPM, AES, Acciona
Energia and Florida Power & Light.

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The Industry Value Chain
An outline of the structure of wind industry is presented below in Figure 3. At the upstream
end are the component suppliers which include gearbox, generators transformers
manufacturers, fixings, machined parts etcetera. As OEMs and developers, we have the
turbine manufacturers instrumental in manufacturing and assembling the turbines and
construct the wind farms. Independent windfarm developers may or may not exist depending
upon the operating business model of the OEMs. In certain cases, the OEMs are
responsible for the project development, before eventually selling it to the downstream
partner, while providing some after sales maintenance support. The downstream members
in the value chain include utilities companies which would take the electricity generated to
the consumer; or private wind companies operating the wind farms for independent
electricity. An integral part of the industry structure comprises of the project support and
management teams who would ensure ongoing services and maintenance post installation
of the wind farm. The owners in this case reflect the demand side of the wind energy
generation industry, while the OEMs and developers would be indicative of the supply side.
Wind industry being a capital intensive one, requires ample financial support. Hence the
presence of financial institutions provides a much required external support throughout the
industry chain.

Figure 3: The Wind Power Industry Structure

Source: Compiled by Author

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 Drivers of M&A Activity
Findings and analysis reveal that the driving factors behind the deals depend on the
positioning of the deal in the industry value chain. It was found that power companies have
acquired wind farms as operating assets in order to add a share of green energy to their
portfolio. The underlying motive behind this has been regulatory requirements that mandate
a certain percentage of energy being produced from a renewable source. In the more
upstream end of the industry, it was found that the merger and acquisition activity is driven
by more conventional motives which include increasing market share, achieving operational
synergy and vertical integration of the supply chain.

A summary of the research findings is as follows:

Target
Acquirer Downstream OEMs Financial Upstream Support TOTAL Primary Motives
Increasing Share of Green Energy in
current Portfolio
Access to International & Growth
Downstream 0 126 1 1 3 131
Markets
Acquisition of operating assets and
teams
Access to Intellectual Capital
Vertical Integration
OEMs 0 61 0 7 3 71 Horizontal Integration Economies of
Scale
Increase in Market Share
High IRR and riding the growth in the
Financial 0 45 2 4 1 52
industry
Horizontal Integration Economies of
Upstream 0 0 0 8 0 8
Scale
Horizontal Integration Economies of
Support 0 1 0 0 9 10
Scale
TOTAL 0 233 3 20 16 272

Table 1: Deal Flows between the different segments of the Industry

1. It was found that the maximum numbers

% of Deals
of deals are in the downstream segment, Upstream
3% 4%
totalling 131 or 48% of the total number
Support
of deals (Figure 4). These acquisition are
the ones in which utility companies, 19% Financial
48%
primarily involved in the generation,
OEMs &
transmission and distribution of electricity 26% Developers
have acquired wind farms across the Downstream

world.
Figure 4: Classification of Deals Based on Industry Structure

2. The second largest numbers of deals are in the OEMs and Developers segment, totalling
71 or 26% in number (Figure 4). Deals in this segment are either wind farm development

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 or operating companies buying other wind farm companies or the wind turbine generating
companies involved in developing and constructing wind farms buying other companies.
3. The third largest number of deals is
the financial deals, where financial
No. of Deals
institutions have added wind power
100 86
generating assets like wind farms to
80 62
their portfolio or have acted as 60 48
37
investors in OEMs and Developers, 40 24
15
thereby providing them the capital to 20
0
run the business. The main motive of Increasing Increase in Financial Operating Entry in Not Classified
Share in Green Capacity / Investment Synergy / Renewables
Portfolio Market Share Economies of Business
these deals from the financial Scale &
Integration

institutions point of view has been to

earn a high rate of return through Figure 4: Classification of Deals Based on Industry Structure

their investment. There are 52 such

deals (Figure 4).
4. The other two types of deals are smaller in number 10 on the support and services side
and 8 in the components suppliers side (Table 1).
5. In as many as 101 (37%) deals, the motive cited for the acquisition was either to invest in
wind energy business and enter into the renewable energy business or add more green
power to existing portfolio of energy generation (Figure 5).
6. Strategically, for 99 or 37.3% of the deals the prime motive was gains like realising
operational synergy, market growth through new products or international expansion,
economies of scale and consolidation or integration of the supply chain. (Figure 5).
7. Financially, 48 or approximately 18% of the deals were due to financial considerations
like capital restructuring; or reduction of existing debts (Figure 5).
8. It is further found that 117 or 43% of the deals are cross-border deals.

Depending upon the segment of the industry; the motives for acquisitions range from adding
green energy to existing portfolio of power while simultaneously adding capacity of electricity
produced as well and increasing international presence for the utility providers; to vertically
integrating supply of components and expanding market share for the manufacturers. The
different priority of motives for the different segments of the industry sector are summarised
in Table 2.

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 Add Green Increase Increase Vertical Earn a high
Energy to Capacity / Inter- Integration IRR on
Existing Market national of Supply Invest-
Portfolio Share Presence Chain ment

Owners (Utility High Medium Medium Low Low

providers) High High

OEMs & Medium High Medium High Low

Developers High

Financial Medium NA Medium NA High

Institutions

Upstream & Low Medium Low High Low

Support

Table 2: Priority of Motives Driving Acquisitions

Case Study: Suzlon Energy, India

Suzlon Energy, an India based wind turbine manufacturer, has emerged as a global leader
and is now one of the top five wind turbine manufacturers with a market share of 9.0%
worldwide 4 (Figure 2) and annual revenues of US$ 5.8 Bn in FY2009, up from US$ 35.3 Mn
in FY2000. This phenomenal rise and success of Suzlon can be attributed to many factors
that revolve around its product offering, R&D and innovation, unique business model and a
global M&A strategy. Suzlon made its first international foray in 1997 when it took over the
manpower of its bankrupt technology partner Sudwind and set up an R&D centre for turbines
in Germany. This was followed by the acquisition of rotor blade manufacturer, AE-Rotor
Technik BV, a bankrupt Dutch company that enabled Suzlon to design and manufacture
rotor blades in the heart of the wind power industry. This acquisition was fostered by
Suzlons belief that a reliable supply chain would be a critical success factor to ensure his
companys growth and later paved the way for a global M&A strategy.

4 st
As of 31 December 2008.

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Summary of Suzlons Acquisitions

Deal Indian wind-turbine maker Suzlon Energy Ltd. said it bought Belgian gearbox maker Hansen
Synopsis Transmissions International NV through its Dutch subsidiary, AE-Rotor Holding BV, from EVE
Holding BV, a 50-50 venture of Allianz Capital Partners and U.K. private-equity firm Apax
Partners Worldwide LLP.

Target Hansen Acquirer AE - Rotor Vendor (Seller) EVE Holding BV,

Transmission Holding BV, Allianz Capital
International subsidiary of Partners And Apax
Suzlon Energy Partners
Limited

Deal Value US$ 563 MN Acquirer Netherlands Deal Purpose Vertical

Country

M&A Vertical Integration efficient supply chain that could ensure timely supply of critical
Motives components while maintaining superior quality and low prices.
Access to International market
Access to Intellectual Property - leveraging cutting edge technology and R&D prowess of
Hansen

Table 3: Acquisition of Hansen Transmissions, Belgium

Deal Synopsis Suzlon Windenergie GmbH, a subsidiary of Suzlon Energy Ltd., announced its intention to
acquire the alternative energy company Repower Systems AG. It was decided that Suzlon
will pay out the entire amount of acquisition over the next three years. Upon completion of
the acquisition Suzlon Energy Ltd controlled 90.7%% in REpower along with Areva and
Martifer.

Target REpower Acquirer Suzlon Energy Vendor (Seller) Areva, Martifer,

Systems AG Public

Deal Value US$ 1.8 BN Acquirer Germany / India Deal Purpose Horizontal
Country

M&A Motives Horizontal Integration Adding expertise in offshore wind generating capacity.
Growth in Market share & access to International market
Access to Intellectual Property - leveraging cutting edge technology and R&D prowess of
Hansen

Table 4: REpower Acquisition

The acquisition of REpower has propelled Suzlon to the third place in the global wind
industry market with a combined share of 12.3% (Figure 6). In addition, it was now well
equipped with a diverse product portfolio provided and complementary product expertise and
an exposure to the offshore industry. Not only did the acquisitions enable Suzlon to keep the
sales rate growing at a very fast pace, but Suzlon was also able to increase its international
presence with over 70% of its revenue coming from foreign markets in 2009 (Table 5).

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 Figure 6: Increase in Market Share after Merger with Repower
Source: Emerging Energy Research

Suzlon Financials (US$

2003 2004 2005 2006 2007 2008 2009
Mn)

Revenue from Sales 53.9 186.7 438.3 849.1 1,837.1 3,410.5 5,143.3
Suzlon 53.9 186.7 438.3 849.1 1,237.7 1,726.8 1,426.9
599.4
Hansen - - - - (32.63%) - -
1683.7** 3716.5
Hansen + REpower - - - - - (49.37%) (72.26%)
EBITDA - 34.3 100.6 193.93 298.1 479.8 555.3
EBITDA Margin (% Sales) - 18.35% 22.95% 22.84% 16.23% 14.07% 10.80%

Table 5: Financial Performance of Suzlon Energy

Source: Suzlon Annual Reports

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Conclusion
The research has tried to identify the key factors that have induced a high level of M&A
activity in the wind energy industry. While it would be fair to say that the industry has seen a
wave of green mergers, in conclusion, it can be said that the acquisitions to quite an extent
depend on the segment of the value chain they lie in. Utility companies have aggressively
purchased wind farms as operating assets primarily to increase the percentage of clean
energy in their portfolio, while simultaneously adding capacity of generation and expanding
to international markets. On the other hand, as seen from the case of Suzlon, the wind
turbine manufacturers typically conform to strategic motives of acquisitions about creating
synergy and optimising operational efficiency as well as expanding their business footprint
across the world.

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This paper has been produced by the Rajiv Gandhi Centre for Innovation and Entrepreneurship
at Imperial College Business School

Copyright Imperial College Business School 2009

All rights reserved

This paper has been produced by the Rajiv Gandhi Centre for Innovation and Entrepreneurship
at Imperial College Business School

Copyright Imperial College Business School 2009

All rights reserved

ISSN: 1744-6783

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