12 Dec The Very Apparent Fork in the Road
You’re Either Buying, Selling… Or Getting Left Behind
By Brandon Ellett
The line “Show me the money!” about a contract in the hit movie Jerry McGuire will go down in history as one of the greatest.
We’ll come back to that.
As my colleague wrote in A Bird in the Hand or Two in the Bush when the page turned to a new year, 2017 was destined to be a year of transition for the retail energy industry. This spot-on prediction was rooted in three prominent factors: fierce and increased competition, declining margins and a rapidly evolving trend toward forward-start agreements.
Electricity contracts that are executed with future start dates have not been favorable to retail electricity providers, increasing their credit risk, market risk and cash flow risk. In reality, these contracts are not the pot of gold many ABCs and REPs believe them to be because they have no real value until their contract start dates, which can up to 5 years out. Aggregators, brokers and consultants (ABCs) also have felt the pain because retail electricity providers (REPs) understandably have not been willing to prepay commissions on contracts that are years away from generating revenues.
Twenty-seventeen has seen a flurry of activity. Brokers are buying or merging with other brokers, REPs are buying brokers and REPs also are buying other retail electricity providers. This flurry of activity is poised to become an all-out snowstorm in 2018. In addition to a plethora of mergers and acquisitions, will we see brokers launching their own REPs or non-related entities coming on the scene?
In the fight to “show me the money,” an epic battle for relationships has ensued because the market has matured, and there are only so many meters, light switches and customers to go around. For every contract added at one ABC and REP, that same contract has expired and potentially left another ABC and REP. Reflecting the dog paddling that’s underway, it’s not uncommon for an REP to lose as many or more residential customer equivalents (RCEs) as it gains. It’s nearly impossible to replace lost business and expired contracts every quarter, and in many cases, replacements come at lower margins. Pitch in the forward-start agreements, and the industry is full of gerbils in a cage on a wheel going nowhere.
On the ride to “show me the money,” you need some hefty jet fuel.
The proverbial shot in the arm for the electricity industry is coming through mergers and acquisitions that follow the path of other mature industries such as banking and insurance.
At the broker-to-broker level, economies of scale are realized through more relationships and clients, so mergers make sense. In the game of ready, set, go, REPs also are jumping in to purchase brokerage firms. And of this you can be certain: Size matters in the world of mergers and acquisitions because the more active (flowing) client relationships there are, the more attractive and valuable the company is. The greater your economies of scale, the more you can leverage people and processes to a larger audience. Along those same lines, the more coverage and volume you have, the more profitable you can be — show me the money — with fewer resources.
Given this backdrop, here’s my take on where the industry is headed.
• A herd mentality will create a deal craze among aggregators, brokers, consultants, channel partners, and retail electricity providers.
• With greater economies of scale under the belt, several national brands will emerge with eventual widespread name recognition.
• Buying sprees and bidding wars will become commonplace. But sellers beware: Buyers will have their pick of the litter. As a result, they’ll have no reason to pay a premium price unless a premium value exists. Sellers with unrealistic expectations or an inflated sense of value will be sorely disappointed and left behind.
• Buyers with access to creative financing will kick the deal craze into overdrive.
Hey, did you get the memo?
The writing is on the wall, and there’s a wet snowball at the top of a very steep hill. Right now, at this very moment, you’re either buying or selling… and you may not even know it.
Brandon Ellett is the founder of The Commission Exchange (thecommissionexchange.com)