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Wave of Acquisitions to Hit Energy Efficiency Sector

Cascadia Capital expects to see a wave of acquisitions in the energy efficiency space, driven by large players who want to get in, and investors who want to get out while the getting is good.

The energy management sector is ripe for consolidation, says Michael Butler, chairman and CEO of Cascadia Capital in Seattle, WA. The next six months could bring a wave of acquisitions, triggered by Schneider Electric's purchase of Summit Energy Services.

"When Schneider made their move and paid a premium for Summit Energy, it opened the floodgates," Butler says. "Every company with a legitimate, real-time energy-management product has been approached by potential buyers."

Summit Energy Services is an energy management service provider with real-time software that commercial and industrial facilities use to save money on energy. Schneider acquired Summit for US $268 million, or approximately four times Summit's revenue.

That deal did not happen in isolation. According to Cleantech Group of San Francisco, the second quarter of 2011 saw the usual darling sectors drop behind energy efficiency -- a crossing of upward and downward trend lines that Cleantech Group predicted in 2009.

Venture capital left the capital-intensive biofuels and solar sectors in Q2, moving to the less capital-intensive energy efficiency sector. Energy efficiency was the leading sector by amount invested, with $428 million; it was also the most popular sector measured by number of deals, with 38 funding rounds, some quite healthy. Three companies -- Bridgelux (LEDs), iControl Networks (home energy management) and Hara (cloud-based enterprise energy management) -- together raised a collective $155 million in the quarter.

Based on this changing landscape, Cascadia Capital has projected that the energy efficiency sector will explode with M&A transactions throughout 2011. This year's difficult business climate is another contributor to the trend.

Small companies are having a hard time getting to market because it's expensive to build out a sales force that can penetrate Fortune 500 companies, Butler explains. "And when they do, the Fortune 500 companies look at the service provider and say,' You don't have a big balance sheet, how do I know you're going to be around?'"

Credibility is not the only barrier for small firms in this sector. Large enterprises take their time making big decisions. Energy efficiency measures also often depend on cooperation from the local energy utility, which are notorious for taking even longer.

"It's a long, long sales cycle," Butler explains. "You have to put up a fair amount of money to fund the time it takes with no guarantee of ultimate success. Venture capital investors and individual investors don't have the deep pockets to fund that."

Those investors are telling Cascadia Capital that they would rather sell now than to double down on their investments to overcome these go-to-market obstacles, Butler says. "Those investors who don't sell now are implicitly making a bet they have the capital to fund a commercial rollout, which will take a few years."

Cascadia has published a sustainable industries market report, "Energy Efficient Sector M&A Scheduled to Accelerate in Second Half of Year," available at the company's web site.

Related article:

"2011, the Year of Energy Efficiency?"