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Ochsner Discusses Top 5 Retail Energy M&A Trends, Tips For Increasing A Supplier's Valuation

January 19, 2021

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Copyright 2010-21
Reporting by Paul Ring •

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Preston Ochsner of Ochsner Interests Inc. shared with his top 5 trends in retail energy M&A, and, in particular, tips for retail suppliers to be attractive targets for buyers.

All quotes below are from Ochsner.

Focus on Adjusted EBITDA

"The days of growth-at-any-cost by being the lowest on Power to Choose (or any other online comparison site) are done. Ten years ago, a supplier could use this strategy to build a book and appeal to one of the Top 10 retailers that wanted to quickly get into a new geographic market or customer class. The acquiring REP would 'pay up' for residential customer equivalents (RCEs). No longer. Those Top 10 retail suppliers are now already in the markets and customer classes they want to be in."

"Unless you are just looking for a tax loss, get creative and find a niche or a partnership with adequate returns. They certainly exist."

Preference for Fixed Price

"Regulators in many markets have reached the tipping point. While I personally believe you should be able to charge whatever you want -- as long as you are honest and the customer understands the product -- that view is certainly in the minority among the various regulatory bodies. Given where the balance of power is going in the United States on the 20th of this month, expect the crackdown on extreme variable products to become even more intense."

"The most sophisticated buyers are already there. I have one buyer in particular that automatically passes if the variable portion of the business is more than 35%."

Creative Green

"To get the likes of Amazon or Walmart interested in buying you and taking your valuation to the next level, have a product(s) tied to specific renewable assets and clearly communicate that to your customers. Renewable generation 'developers' in most markets are begging for off-take. Retailers can get creative with term, deal structure, and credit insurance to buy directly from the new generation."

"ERCOT alone has 88,032 MWs of new solar generation in the pipeline. If independent retailers do not start buying that generation, then the incumbent providers will buy it and continue (actually increase) their cost advantage."

"Chariot Energy and 174 Power Global are one example of a group that appears to be going in the right direction here. NRG Energy with their Renewable Select offering is another."

Balanced Mix of Power and Gas

"Become a retailer with 100,000 or more RCEs in multiple states with at least 40% of your revenue from natural gas. Your multiple will go from 4-5 to 6-7. That may not seem like a significant difference until you do the math on $10 million (for example) of Adjusted EBITDA."

"After my days at Enron, I never thought I would recommend the California retail market in any form; but it is actually an outstanding residential natural gas market today. In many of the PJM markets where there are dual-fuel customers, you are throwing customer acquisition dollars out the window if you don't serve both gas and power. With that said, I still see many old and new retailers just focus on power for some reason."

Employee Stock Option Plans (ESOP)

"Both corporate and individual taxes are certainly going to increase. An ESOP gives retailers an elegant way to 1) reward and retain employees 2) provide a full or partial exit for the founders and 3) significantly reduce overall taxes. Additionally, I have several clients today that were not able to get the valuation they wanted from traditional buyers, but they were able to get that valuation via an ESOP."

"StarTex Power was a good example of this. Santanna Energy Services seems to have done it well also. The ESOP attorneys that I work with are so busy they are turning away business."

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