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What is the value of a TPI?

Colin Magee Colin Magee Non Domestic Retail Team Leader
30th May 2017

Over the past 5 years we have seen more than 30 Mergers and Acquisitions (M&A) in the TPI sector. The GB energy market doesn’t display the same volume as this corporate activity overall, so why does energy brokerage display such high levels of M&A activity compared to other sectors of the market? At Cornwall we see a few drivers behind this trend:

  • Scale of Market - The sheer number of TPIs in the market, and therefore the number of potential acquisitions, far exceeds what we see in the other sectors of the GB energy market. By our estimates there could be as many ten times the number of companies brokering energy deals, as there are selling them. Part of the reason for this market scale may be  that the brokering of energy is still one of the few unregulated activities in our market.
  • Portfolio Growth - In a market where organic growth has been hard to come by, M&A has been a key (if not the only) strategy for TPIs to increase their portfolio size. To the same extent it can help / attract new entrants, such as the entry of Inprova Energy which came with the acquisition of three TPIs in 2015.
  • Service Expansion – TPIs and suppliers are both increasingly competing on what services they can offer beyond energy procurement, which has been another key driver of M&A activity. Over the last few years Inspired Energy has been actively acquiring a number companies that either expands its range of services, or gives it access to a new customer segment.

This at least explains much of the activity that we have seen in recent years. It doesn’t necessarily look like it will slow just yet. The future of M&A activity be driven by different factors, such as the opening of the water market, emergence of a Code of Practice, the rise of online energy management systems, the need for cyber security, battery storage, demand side response, or a myriad of other influences.

At Cornwall we track and assess almost 300 TPIs in our quarterly Third Party Intermediaries in the Business and Industrial Supply Markets report. In a previous blog, we highlighted the recent trends in Index Scores, which are derived from an assessment of a TPIs financial performance, range of services, employee numbers, and portfolio size.

In the chart below we have plotted the value of TPI acquisitions—where known—over the last five years against what its Cornwall Index Score was at the time. From this, we can see the relationship between Index Score and sale value (which would be expected to an extent as the Index Score is a reflection of size). However, the strength of the relationship is quite interesting, which for the statistically inclined was a p-value of < 0.05. When valuing a company, a huge variety factors are taken into account (management team, marketability, location, market environment, business plan and earnings, capital structure reputation…etc.), and whilst these factors still impact TPIs, the close relationship between the Index Score and TPI sale price highlights that size and services appear to be very direct and significant drivers of valuation.

 

Figure 1: Cornwall Index Score versus TPI cost of sale

 For more information about the report please contact Colin Magee on c.magee@cornwall-insight.com or 01603 604426.

Our other analysis on TPIs