Infrastructure M&A enjoyed a buoyant year in 2018, driven by long-term trends: a shift to renewables, the evolution of disruptive new technologies and significant capital raising

In 2018, the infrastructure sector broke new M&A records—total value rose 36% to US$279.6 billion, with deal volumes up by 3%. On both measures, 2018 represented the busiest year for M&A in the infrastructure industry in the past decade, with deals in each of the renewables, telecoms and transport sectors hitting new highs.

While there are short-term challenges to dealmaking—the uncertainties of Brexit in Europe, and the impacts of the trade dispute between China and the US, for example—the case for the strong M&A market enduring is compelling. In the medium to long term, the factors driving deals in infrastructure show no sign of abating.

2018 in review

The biggest infrastructure deal of last year saw the Spanish toll road management business Abertis acquired by a consortium including its compatriot ACS and Germany’s Hochtief. The transaction, worth US$19.1 billion, was almost twice the size of the second-largest deal of the year, the US$8.8 billion takeover of Danish telecoms business TDC, which was also bought by a European consortium.

Indeed, Europe was the busiest region of all for infrastructure M&A last year, and by quite some margin. Infrastructure M&A activity in Europe in 2018 accounted for 51% of all such transactions globally, including eight of the 15 largest deals of the year. With some 442 deals worth US$141.8 billion (an increase of 56% compared to 2017), activity significantly outpaced North America, the next most-active dealmaking region with 204 deals valued at US$85.7 billion.

In fact, Europe’s strong infrastructure M&A market was the driving force in pushing global deal volumes and values so high last year. While North America also registered surging activity compared to 2017—volumes and values were up 18% and 96% respectively—other regions posted lower figures. The Middle East recorded total deal value of just US$56.9 million last year, down from US$3.5 billion a year previously. Australasia also registered a notable fall, with a total deal value of US$14.2 billion last year, compared to $20.7 billion in 2017.

Deals in the renewable energy space reached US$59.1 billion in deal value during 2018, accounting for 21% of all infrastructure M&A over the course of the year. This figure also represents a remarkable 67% increase on the deal value recorded in 2017.

The energy sector was an important contributor to total deal values, with US$58.8 billion worth of transactions last year. That total was up 80% on 2017. Telecom infrastructure M&A recorded the strongest year on record, with deal values of US$33.2 billion in 2018, more than double the figure recorded in 2017—which at US$14.6 billion was itself a record. Deal values in the transportation sector also hit an all-time high, rising 38% to US$73.3 billion.

Drivers for growth

Whether value and volume can be maintained at the levels seen last year—or even boast further growth—will now depend on the extent to which drivers of deal activity have further to run.

In renewables, for example, M&A activity is being sustained by a combination of positive factors. Not only are traditional energy businesses scrambling to acquire new capabilities in this field, but institutional investors are keen to increase their exposure to an asset class that offers relatively stable returns. Public demand for action on climate change, plus a legislative imperative in the form of legally binding emissions targets, is another important driver.

The biggest deal in the renewables sector last year, Global Infrastructure Partners’ US$5.7 billion purchase of a 50% stake in the Hornsea offshore wind farm in the UK, is just one example of the huge appetite for high-quality assets in renewables.

In telecom, last year’s record levels of activity were powered by the race in both developed and developing economies to boost digitalization and connectivity. And this race shows no signs of slowing—without an infrastructure network capable of supporting next-generation communications technologies, including 5G, countries will be left behind.

The biggest telecom infrastructure deal of 2018 reflected this imperative. A group of Danish pension funds and infrastructure investor Macquarie agreed to pay US$8.8 billion for the Danish telecoms business TDC. The group’s promise to make significant investments in networks, bringing broadband offering speeds of 1GB per second to all Danish households by 2025, was an important factor in clinching the deal.

The transportation sector, meanwhile, accounted for three of the five biggest infrastructure M&A transactions last year. Atop the Abertis acquisition, a consortium of international investors paid US$6.6 billion for a 51% stake in Australia’s Sydney Motorway Corp., while in North America, a majority stake in Orient Overseas International, the transport and logistics business, was sold for US$6.3 billion.

There are good reasons to think transportation can continue to generate significant M&A volumes. Consolidation remains a key theme in parts of transportation infrastructure, while the sector is also an attractive target for investors focused on stable income streams—toll operators are a good example. The sector is ripe for disruption from new technologies such as the internet of things and cloud computing, as more and more of the logistics chain undergoes digitalization.

Investment capital strong

Infrastructure fund capital raising potentially provides the final piece in the jigsaw. Investors pumped US$85 billion into infrastructure funds last year, up US$10 billion on 2017, according to data from market research firm Preqin, with funds continuing to raise capital in the early months of 2019. Private equity and private debt funds also raised near-record sums last year, some of which is likely to find its way into the infrastructure.

The result is that investors’ “dry powder”—their sums yet to be invested—now stands at an all-time high. That augurs well for further M&A over the year ahead, as funds seek to put their capital to work. Add in the imperative for dealmaking as structural changes across so many different sub-sectors of infrastructure continues, and the M&A outlook looks as strong as ever.