00:00Joining us for today's IC is Bloomberg Deals reporter David Carnavali, Andrew Calder, he's
00:05executive committee member at Kirkland & Ellison, and George Bilicic, he's managing director and
00:09global head of power, energy, and infrastructure at Lazard. Thank you all so much for joining. And
00:15I got to say, no two better guests, because you both were directly involved in the NextEra
00:19Dominion deal. I would love to know, because we've had these mega deals in the industry,
00:24and George, starting with you, it's a massive consolidation wave. Is more to come? Are we
00:28still in the era of mega deals? Are you expecting more with price tags of $100 billion plus?
00:34We think there'll be steady consolidation across a number of industries, including in the energy
00:39industry, whether it's utilities or otherwise. And there's no reason for it to stop, but I would also
00:45not expect it to be rapidly accelerating. And there are different drivers for that, which I'm sure we'll
00:50discuss. We definitely will. But Andy, let me get your pulse checked too. Still in the era of the
00:54mega deals? Yeah, same thing. I mean, look, it's all based on artificial intelligence and the
00:58demands on the grid. And so as we continue to see that accelerate, I think you're going to see
01:04obviously the same acceleration in M&E and the energy space.
01:09What about smaller deals, right? I mean, it really stood out to me that one of the rationale for
01:16Dominion to do this deal with NextEra as a target was the idea that Dominion wasn't big enough.
01:21We're talking about a $60 billion market cap company, right? So big, but it wasn't scaled.
01:27So what about the $5, $10, $15, $30 billion market cap companies in the utility space in particular
01:34that are very local, that are very, I would say, the way subscale? And maybe they don't have the
01:41balance sheet to face this demand that is coming to them from the AI buildup. So is this a good
01:48time
01:49for these companies to A, consider mergers to gain scale or even take private transactions where in
01:56the hands of private equity owners or infrastructure funds, they could have those deep pockets that they
02:02need to really navigate this environment? So it's a great question. It's historically in the
02:10industry, the utility industry, there's been this steady wave of consolidation sometimes because
02:14companies feel like they're too small. And you'll definitely have some companies who decide
02:19to merge or transact because they're worried about scale. But also these companies are regulated
02:25and they have the support of regulation. And the size and scale benefits are sometimes hard to see.
02:30So I would not expect a wave, but I would expect some things like this to happen. And they've been
02:35happening. Andy, can I get your thoughts on that? Just how much regulatory overhang there is? Because
02:40this is an administration which, yes, is dealing with an affordability crisis, but has been more
02:44friendly when it comes to M&A. Yeah, look, I think there's general recognition in Washington that we
02:50need to win the AI race. And I think as a result of that, there is a vested sort of
02:55interest in making
02:56sure that there can be consolidation. And at the end of the day, all of these deals reflect a need
03:02to
03:02get access to capital. Even if it impacts affordability ahead of the midterms? I think that will obviously be top
03:08the priority list for many of the regulators. And I think it is top of the priority list. I think
03:13the difference with some of these deals is they're not being done to try and get cost savings or
03:18synergies. They're really being done to try and get access to capital. And I think most of the
03:24counterparties, they're not only looking at access to capital, but they're looking at trying to keep
03:28rates relatively affordable across the board. And Andy, I mean, this is all part of a big
03:34infrastructure play. You guys with Kirkland have been ahead of the curve in terms of really investing
03:42in this market in terms of building the practice, which is now one of the growth engines of the firm.
03:48What did you see 10 years ago when people were looking in other directions and not paying attention?
03:55And how has the market changed in the last decade in terms of scale, in terms of players that are
04:04coming in? How have you seen it evolving? Yeah, I mean, one of the fun things about being an
04:09infrastructure lawyer is it's a rapidly evolving space. It's very dynamic. And so when I first
04:14started doing energy and infrastructure, it was really in the midst of the shale boom, which then
04:19led to midstream and LNG expansion. Now, in the last 10 years, I would say, look, you wouldn't have
04:25been having a panel on energy and utilities 15 years ago. It wasn't a very exciting space. But with the
04:31data center expansion, digital infrastructure, we obviously lead that market and we see it across
04:36the board. And as soon as you see that kind of explosion in one space, it's going to lead to
04:41corresponding increases. So energy has been great. Power and utilities is a really exciting space.
04:47I'm guessing you would probably agree, George. And I wonder how all of that has also changed the
04:51pricing of deals versus eras past. So it hasn't, it changes the, it's changed the calculus around
04:59transactions because it's so driven by the capital investment opportunity and the sheer scale of it,
05:05which is just truly enormous. And it's, it's also causing different subsectors of energy broadly
05:12defined to bleed together a little bit in terms of strategy and transaction considerations.
05:19So what about, there is a, in my mind, there's a distinction to be made between the power sector
05:26and the utility sector. So we're talking about generations versus distribution, right? My sense
05:33is that the power sector is quite consolidated already, whereas the utility sector is a bit
05:38more fragmented. So I wonder whether you guys are spending more time right now in the utility
05:43space because you have, you see more room for dealmaking than the power sector, or how are you
05:48playing that game? From our perspective, I think you're broadly correct in terms of the split between
05:54power and obviously utilities, but we're seeing activity across the board. I think you're correct
06:01that it's more consolidated, but at the same time, it's still an interest in space and generation.
06:05That tends to have more project debt and more, be more of a sort of project level enterprise.
06:09On the transmission side, which obviously bleeds into utilities, we just need more investment
06:15across the board. And I think everyone recognizes that. And so we're seeing a lot of activity in
06:19that space too.
06:21So George, obviously you and I have talked about how the market is changing and it's all part of this
06:28infrastructure industry. Now you have power, you have utility, you have midstream companies,
06:33so LNG. And I wonder whether the lines are getting a bit more blurry in terms of potentially vertical
06:41integration. Are we going to see power companies by midstream companies in the future? What's your
06:47read on that?
06:48So a lot of the themes we discuss across our client base are very similar right now, driven by this
06:55incredible need for new generation. The fact that most of it's going to be driven by natural gas.
07:01And so whether you're a pipeline company, an E&P company, a utility or a power company, you're
07:06thinking about a lot of the same stuff. There are different things you're contemplating as well.
07:10And I could see, you have seen some vertical integration. So you've seen some E&P companies
07:17look at power. You've seen different E&P companies look at LNG. And if you think about the problem
07:25that's trying to be solved around a data center complex, you need gas transportation, you need
07:31power, you need the data center expertise, you need the electrical wiring, you need all of these
07:37sorts of things. And we see over time, you know, a solutions provider developing that can do all of that,
07:44uh, which would suggest some, some blending together of, of things.
07:48Just, just one final question on just to pick up on what Danny was asking about valuations.
07:54This market reminds me a little bit of the pandemic in terms of there was a tech situation where you
08:01had
08:01this massive FOMO and the market was moving very quickly. And now you have AI and people have fear of
08:08missing out and people have to think very quickly. Valuations are getting a bit stretched. You have
08:14to believe the growth and growth obviously is very aggressive right now in terms of expectations.
08:19What's your read? You obviously Andy work with some of the largest infra funds and private equity funds
08:24and they are all over the situations. What are you hearing from them?
08:27So I'll defer to valuations to the banker on the panel. But I would say when you see the demand
08:33and data center, uh, build out, I, I think this is going to continue to be a very hot place
08:39to
08:39invest. And obviously that has its effect on valuations. But there's always parts,
08:43even when things are hot, that we go too far and they're frothy. George,
08:46are there any corners of this market that you think have gotten too frothy?
08:48I tell you, look at the total addressable market of potential investment opportunity
08:52in this broad, uh, AI data center technology space, and you can support super high valuations.
09:00So, uh, you'll see high valuations printed. You see different companies trading at very high
09:06valuations, but you can rationalize them based on the total addressable market for investment.
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