2023 Predictions

Emilio Zito

Against a backdrop of rising energy commodity prices, Emilio Zito, the head of M&A and investor relations at French utility firm EDF, talks about the dealmaking environment in Europe and beyond.

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Price adjustment, earn-outs, deferred payments, this sort of share purchase agreements, continue to be used even more than before, because when you’re facing huge volatility...the best way to protect the seller – but also the buyer, because ultimately we want this to be win-win – is to create this sort of mechanism
Emilio Zito, Head of M&A and investor relations, EDF


The M&A market is in a very different place compared to where it was when we were working on this report last year. Do you think that we will see a significant drop in deal activity next year, or is it still going to be fairly high by historical standards?

I think M&A activity will continue to be quite sustained. Not the same as last year, of course. When I say last year, I mean pre-October. From October/ November, the inflation situation created by energy commodity prices started to have an impact on the outlook and on people’s ability to make strategic decisions. And of course, everything got completely out of hand when the war in Ukraine started in February, which created the situation we know today with regards to inflation and interest rates.

This environment is clearly not ideal for M&A, because it is not easy to firm up valuations. For buyers, it is a good environment, and probably for funds, because valuations are coming down a little across most industries. But for sellers, in general it’s not a great time to sell – though some strategic asset classes and longterm value platforms will likely continue to attract good and competitive valuations.

So why did I say that M&A activity will continue to be sustained? Precisely because of this situation. When you are in this crisis mode, you get fewer deals – but a good number of high-profile or big deals will happen in order to rescue companies or projects, and to inject new capital into distressed situations. Some companies in our industry have projects that are experiencing issues with cash, valuations, pricing or commodity exposures, and so on.


You mentioned that funds might be in a better position than corporates for M&A. It has been interesting so far this year, because we have seen PE activity fall quite significantly – do you think this is a period of adjustment for funds, but that they should be better positioned than corporates to take advantage of the current market dynamics?

Yes, because we are seeing a huge amount of capital being raised by some of the mega funds and some of the biggest infrastructure funds in Europe and the US. There is a lot of liquidity in their hands. But there are fewer opportunities today, again, because of the current macroeconomic and geopolitical situation.

Balance sheets of companies and developers in the energy sector, for example, will generally be more stretched than before, and it will be more challenging to keep the “growth, yield and investment grade” equation valid. In my view, funds should be able to play a more impactful role in M&A in the next two to five years, by partnering with and, in some cases, even replacing the incumbents.


You mentioned lower valuations. We have seen an increase in earn-outs and other deferred structures in recent years. Is this something that we will continue to see? Is it challenging to agree on how to structure these considerations?

For sure: price adjustment, earn -outs, deferred payments, this sort of share purchase agreement continue to be used even more than before, because when you’re facing huge volatility in terms of valuation, pricing and the environment, the best way to protect the seller – but also the buyer, because ultimately we want this to be win-win – is to create this sort of mechanism. In most of these cases this allows you to not lose value due to externalities. For the assets we are talking about in the energy space, so much depends on externalities, like volatility in commodity prices and in terms of geopolitics.


The topic of ESG has come a long way in the past few years. Talking to dealmakers around the world, it seems that Europe and the US are leading on imposing a higher standard. Will companies based in other jurisdictions end up defaulting to the tougher regulations set by the EC and the US?

Look, it’s not easy to answer. ESG is of course embedded in our corporate governance, in our strategy and I would even say in our society. My view is that it will not go away and it will continue to grow. Of course, we have many differences between regions and countries. But, to focus on Europe, a year ago I would have said that ESG is having a strong impact on M&A, that companies are using M&A to achieve their ESG goals – this will continue and will eventually get stronger.

In the next few months though, we might see some flexibility on this. There will be some tension between ESG objectives and the crisis reality we are facing in the energy space. It is inevitable that some concessions will have to be made at least in the very short term. Mid-/longerterm strategies will still be based on it, I have no doubt.


To stick to the topic of regulation, in recent years we have seen increased scrutiny around foreign investments in many jurisdictions, as well as greater intervention by anti-trust and merger control authorities. Have you noticed an increase in these types of regulatory scrutiny?

The short answer is yes, we will continue to see state intervention. Our industry has always been of strategic interest, but now it’s becoming more visible and critical. Governments, authorities, regulators and even companies are talking about it publicly. An example: in Europe, we are going to see governments try to limit the increase in energy bills. If there was no intervention by companies and governments or the EU at all, it would be tough for the economy and society to stay healthy.

This example is in front of us now and there is debate happening at government and EU levels about, among other things, the possibility to adjust the energy market structure in Europe.

Considering all of these challenges, I think energy and utilities companies are showing a lot of resilience. Energy is clearly vital to human activity and, you know, I think people in this industry should be very proud at the moment of how they are reacting to try to fix issues that in most cases are completely out of their control, in most cases external to business issues.



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