Cleantech Market Intelligence
In Slowing Market, Echelon Exits Smart Grids
The market for smart grid technology is still growing — in fact, Navigant Research expects it to grow from $44 billion this year to more than $70 billion in 2023 — but that doesn’t mean it offers easy money for vendors. In fact, among smart meter vendors in particular, the recent slowdown in demand following the boom years under American Recovery and Reinvestment Act (ARRA) stimulus funding in the United States and several large European deployments is prompting consolidation along with speculation that there is more to come.
San Jose, California-based Echelon announced on August 21 that it is exiting the smart grid market to focus on its Industrial Internet of Things (IIoT) division. Linz, Austria-based S&T AG will acquire Echelon’s smart grid division for modest consideration — according to SEC filings from Echelon, it will receive in the neighborhood of $5 million before expenses related to the deal; debts associated with the division will also be assumed by S&T.
From S&T’s point of view, the deal is attractive in both financial and strategic terms. S&T will form a new company, along with unnamed financial investors, and spend approximately $3.3 million (€2.5 million) for 40% of the company, implying an enterprise value of just more than $8 million, or about 0.3 times run-rate revenue for the division. That low multiple reflects the 52.7% decline in smart grid revenue that Echelon suffered in 2013 versus 2012 and its reliance upon a small number of customers.
In contrast, publicly traded Itron, which has also been the subject of recent deal speculation, is valued by the market at 1 times run-rate revenue. Considering typical acquisition premiums for technology businesses (typically 25%-50%), one could argue that Itron’s value in a sale would be north of $2.5 billion, or between 1.3 and 1.5 times run-rate revenue.
A large IT solutions and services company, S&T has recently expanded its offerings in the smart grid space. It has a solid presence in Central and Eastern European markets where Echelon’s power line carrier technology is likely to be dominant for smart meter deployments. Whereas many Western European meter projects are well into the deployment process (or at least in the request for proposal stage), several Central and Eastern European governments have committed to Europe’s 20-20-20 initiative and smart meter deployments, but major utilities have not yet made significant commitments to vendors.
At least one Wall Street analyst expects additional consolidation among smart grid technology vendors. Louis Basenese of Wall Street Daily reported on August 18 that more than $30 billion in smart grid deals have occurred over the past 2 years. Of course, GE’s $17 billion buy of Alstom Grid will add substantially to that sum, but Basenese believes both Itron and Silver Spring Networks are presently attractive, largely because of their patent portfolios.
Unfortunately, Echelon appears to have been forced to sell at what may be a nadir in the market for smart meter business — but considering the growth ahead for smart grid technology deployments, I would agree with Basenese that more deals are likely to emerge.