* Total 398 deals worth $125 billion struck last year
* Africa, Japan, Gulf, S.America target markets
* European utilities sold $30 billion assets last year
LONDON, Feb 27 (Reuters) - The brisk pace of M&A activity in the global power and utility sector is expected to continue in 2014 after deals hit a three-year high last year, as utilities look to shed debt and expand into non-core markets, consultancy Ernst & Young said.
Companies in the sector concluded a total of 398 deals worth $125 billion in 2013, with the largest the takeover of Las Vegas utility NV Energy by a unit of Warren Buffet’s Berkshire Hathaway.
Deals are expected to continue at a high pace this year as utilities exposed to tighter regulation and falling power prices at home look to expand elsewhere, E&Y said in its annual power transactions report.
“Capital mobility will be an essential driver of transactions during 2014 as companies looking to diversify away from markets with excess capacity and low returns shift their focus towards emerging and reforming markets,” said Matthew Rennie, E&Y power and utilities leader.
“We expect Africa, Japan, the Gulf States and South America to be focus areas for cross-border investors,” he added.
In Europe, utilities have seen renewable energy output weigh on power prices, which with tighter regulation has forced them to rethink their business models.
This has left Europe’s major utilities with huge debt piles, leading to a flurry of divestments to contain costs.
European utilities sold around $30 billion of assets in 2013 and further divestment programmes announced by major players show this trend will continue into 2014.
Companies including Germany’s RWE, Italy’s Enel , Finland’s Fortum and Sweden’s Vattenfall are continuing to look for buyers for parts of their businesses, E&Y said.
Last year also saw an increase in interest from financial investors in Europe’s power sector, with 27 percent more deals struck by financial investors than in 2012.
“This can be largely attributed to heightened interest in regulated electricity transmission and distribution and water assets,” E&Y said in its report.
The acquisition of RWE’s Czech gas network by Allianz Capital Markets and Borealis in March 2013 for 1.6 billion euros is one such example.
Power transmission and distribution assets are highly regulated, meaning operators’ returns are very predictable which makes them more attractive to risk averse investors.