Beyond the clamor and excitement surrounding traditional cleantech companies – solar, wind, energy efficiency, and alternative fuels – there are many attractive and growing, middle market energy technology companies quietly improving the operations and capabilities of electric utilities, oil and gas companies, government agencies, and energy market traders, among others, with software, data and analytics, and consulting and integration services. While the “green” aspects of these businesses aren’t always obvious or essential to their marketing, the benefits they provide to businesses in the energy sector are compelling, and strategic and financial acquirers are taking notice and paying attractive prices.
Of the more than fifty U.S. middle market energy software transactions that have occurred in 2011, just 25 percent would typically be perceived as “cleantech”. The remaining 75 percent provide solutions that improve the capabilities and operations of energy market participants, but don’t have a “green” component at the core of the offering. Their software solutions are often tightly integrated with critical energy infrastructure and operational technologies, leverage complex algorithms and data processing engines, and are integral to customer operations and difficult to replace.
Software business models vary from software as a service (“SaaS”) subscription pricing to traditional license and maintenance pricing. Companies that have been able to drive premium valuations typically have high customer retention, track records of increased revenue per customer, and large and growing recurring revenue streams.
While the global energy IT sector is growing at a modest rate, just over 4 percent, it is large, over $100 billion, according to Gartner. The substantial annual IT budgets of companies in the energy sector create opportunity for middle market solution providers to quickly gain scale and grow at double digit rates. Utilities and other market participants looking for increased efficiency and lower maintenance and IT personnel costs are increasingly directing their IT budgets towards third-party software solutions in favor of antiquated, in-house systems. In addition, an ever more stringent regulatory environment is placing heightened compliance and reporting demands on energy companies that are difficult and costly to meet with existing internal IT resources.
The highest profile M&A transaction in the traditional energy technology sector in 2011 is perhaps Schneider Electric’s acquisition of Telvent, which was valued at $2.0 billion (12 x consensus 2011 EBITDA). Characteristic of many acquisitions in the sector, Telvent provides Schneider with multiple benefits: an attractive recurring revenue stream, and the ability to bring additional technology and capabilities as it pursues energy, oil and gas, water and transportation projects across both Schneider’s and Telvent’s geographic footprints. Schneider expects to generate sales synergies of €250 – €300 million through 2016, representing substantial increases over Telvent’s €753 million in 2010 sales.
Other examples of middle market energy technology transactions outside of cleantech in 2011 include Hellman & Friedman’s acquisition of OpenLink Financial; Welsh Carson’s $500 million acquisition of Triple Point Technology; IHS’s $500 million acquisition of Seismic Micro-Technology; and GE’s acquisition of SmartSignal. Growth equity investors have also been funding the next generation of energy technology companies through private placements in 2011, such as TA Associates and Madrone Capital Partners investing $100+ million in MicroSeismic; Goldman Sachs, Kleiner Perkins, Energy Capital Group, and others investing $60 million in NEOS GeoSolutions; and Kleiner Perkins and Technology Crossover Ventures investing $135 million in OSIsoft.
Expect 2012 to be another very active year in middle market energy technology M&A. Those firms that may drive M&A activity include recently acquired platforms such as OpenLink and Triple Point, which are backed by fresh capital and new potential add-on acquisition strategies; existing private equity platforms such as P2 Energy (Vista Equity), Quorum Business Solutions (Riverstone) and Energy Solutions International (Oaktree / GFI) that are positioned to complete add-ons; large industrial energy companies such as GE (s GE), ABB (s ABB), Honeywell (s HON), Schneider, and Siemens that have historically pursued targets to build on their IT / OT convergence initiatives; and large technology companies such as Oracle, IBM (s IBM), and SAP (s SAP) that continue to add new vertical capabilities, data and analytics to their diverse software portfolios.
Buoyant debt markets combined with the strong revenue visibility and attractive free cash flow characteristics of companies in the sector should further contribute to private equity activity and new platform companies being established.
Tyler Dewing is a Vice President at Harris Williams & Co. and a member of the firm’s Technology, Media & Telecom (TMT) Group. Harris Williams & Co. is a leading middle market investment bank with a 20-year legacy in mergers and acquisitions transactions and is actively involved in the energy technology and cleantech industries, among others. The firm’s TMT Group has extensive industry knowledge and transaction leadership experience spanning the software, internet, digital media, IT services, and communications sectors. For more information, visit www.harriswilliams.com.
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