Middle market M&A activity in electric vehicles is following the supply chain, with charging infrastructure deals in full swing, batteries next, and EVs themselves further down the road. Here’s what it means for M&A:
Bankers and analysts following the sector see OEMs developing EV models and tooling up to produce vehicles, while electrical giants like Siemens and Schneider are working on technology. A raft of smaller companies, meanwhile, are focused on infrastructure, which is where most of the middle-market action is.
“If you build it, they will come,” says Jeremy Klingel, senior partner at West Monroe. “They are creating an entirely new ecosystem.”
Virtually all of the publicized EV deals tracked by Raymond James cleantech analyst Pavel Molchanov in the third quarter involve charging infrastructure providers. Those with values disclosed range from $55 million to $913 million
There is a good reason for this. Nobody wants to be stuck in an electric car that runs out of juice.
“There’s a lot of range anxiety,” acknowledges Klingel. “It’s a big issue.” He adds that it’s going to take more than a charging station every 50 miles to resolve the problem. Charging has to be reliable and accessible, as well as affordable.
Recent legislation in the U.S. has enabled the federal government to pony up the funds to seed this infrastructure development. Both the $1.2 trillion Infrastructure Investment and Jobs Act and the $750 billion Inflation Reduction Act provide funds for EVs for everything from charging stations to vehicle subsidies.
“Federal funding takes the edge off,” notes Klingel. “The government animates this market.”
For those following the EV sector, the investment here is analogous to the transition to smart meters and distributed power in the utility market. In fact, utilities have a big role to play in this new shift by building transmission lines to renewable energy generated by wind and solar and improving reliability in the grid.
“The EV infrastructure is taking on more shape,” says David Hale, a Detroit-based director for Stout. “As the industry ramps up, development becomes self-reinforcing.”
Private equity is playing a major role in this development. “Groups are hungry,” says Hale, who spent much of his career in PE. “They are ready to deploy capital.”
A recent automotive industry report from Stout, co-authored by Hale, spoke of the “electrification revolution” as producers along the supply chain gear up for the transition to EVs.
West Monroe’s Klingel concurs. “Middle-market PEs are not pursuing the vehicles themselves, but a piece of the infrastructure,” he says.
Given the number of Tier 1 players in the sector, from energy giants like BP and Shell to OEMs, fund groups have to play a supporting role. “PE groups are active in smaller deals,” says Raymond James’ Molchanov.
For all the focus on EVs and investment along the supply chain however, it remains an open question where this will end. The sun is definitely setting on gasoline-fueled internal combustion engines, but are pure EVs the only solution?
Klingel sees a chance for flexible fuel vehicles to remedy some of the issues, particularly with heavy duty liquid hydrogen blends for buses and trucks that need to function in all temperatures and over longer distances. Also, liquid hydrogen can be used as aviation fuel.
Europe, for one, is years ahead of the U.S. in developing hydrogen fuels. Linde, the world’s largest producer of industrial gases, has said that green hydrogen – produced by electrolyzers from renewable energy sources – will be driving the German company’s growth.
Dozens of other companies – in locations as diverse as Australia, Canada, Mauritania, Kazakhstan, Netherlands, and Norway – are mounting projects, many of the them due for completion by the end of the decade, to tap into solar, wind, hydro and other renewable energy sources to power production of hydrogen.
Hydrogen fuel cell electric powertrains are another option, generating electricity for an EV from a fuel cell instead of a battery. Klingel cites the recent entry of Germany’s Quantron into the U.S. market as the specialist in FCEV commercial vehicles brings its expertise and success in Europe to North America.
Klingel relates that on a recent trip in his hybrid vehicle, he stopped at three charging stations, but only one was working, so he was happy to have the gas engine as a fallback. While improvements are on the way, it is a question whether a battery-operated EV is the best solution.
The issue of range is especially critical for fleet managers, which is where the rubber meets the road on EVs.
“The question for fleet management is total cost of ownership,” says Arun Kumar, managing director for automotive at management consultant AlixPartners. “An individual may make a choice for emotional reasons, while the choice for a fleet is more factual and objective.”
Kumar recently warned at an industry conference that firms with large vehicle fleets could waste much of the $75 billion AlixPartners estimates will be needed for them to transition to EVs if they get the timing wrong. He cautioned them against making hasty commitments. Rather, they need to consider broader questions like charging infrastructures, charging times, possible lower uptimes or route changes for service vehicles.
“TCO must be positive to justify the expense,” Kumar emphasizes, and all these factors play into the cost equation. Kumar has carried this message for a use-case analysis not only to fleet managers, but to PE firms and other investors trying to develop a roadmap for the transition away from internal combustion engines.
It is a transition that is undoubtedly happening. “EVs are real,” comments Kumar, “and the pace is accelerating.” Regulation, like California’s plan to ban new gas and diesel-powered vehicles by 2035, is spurring activity. Fleet managers stand to reap considerable savings, but only if they are careful to make investments at the right time.
The transition is creating a ferment in what used to be a mature industry. According to Stout managing director Mike Benson, another co-author of the firm’s report: “We haven’t seen this kind of activity in automotive for many years.”
