On July 30, 2013, Direct Energy Business Services (Direct) announced that it was acquiring Hess Energy Marketing, a long-time powerhouse of electricity and natural gas supply in the Northeast. According to published reports, Direct paid over $730 million dollars for Hess, not including an additional $300 million in working capital. This acquisition did not shock the industry as Hess had been trying to sell its energy marketing business to focus on its exploration and production activities. This highlights an emerging trend in the energy markets that could have meaningful implications for end users in the energy industry—namely a move towards consolidation.
Growing a dual fuel business
The merger of these two companies should create benefits for each one of them, but more
importantly the new entity could become a one stop shop for end users’ energy
needs. Prior to the acquisition, Direct Energy Business operated in 12 states with annual revenue of $4 billion, while Hess operated in 18 states with $6 billion in annual revenue. The acquisition of Hess will add 23,000 business customers, making Direct Energy, a subsidiary of Centrica plc of London, one of the largest business-to-business energy suppliers in the eastern United States, with annual revenue of $10 billion. For the businesses involved in this transaction, the obvious benefit is the increase in market share for them. As Direct Energy CEO and President Badar Khan observed in the press release announcing the purchase, “this transaction will transform our B2B (business to business) operations in North America, giving us leading positions in business gas and power supply and creating a unique dual
fuel business in the US.”
Potential declines in customer service?
As companies in any industry merge, there is a time of upheaval at both the acquired and
acquiring company. In other words change becomes the order of the day! There is a natural human reaction as people worry about their future during times of uncertainty and productivity could be affected. Consequently, there is the risk of service interruptions and longer response times to clients due to culture and system integration. From our experience in the retail industry, while there will be synergies, there will also be duplication of responsibilities that need to be addressed promptly or possible service or product changes overtime. Moreover, adapting to new systems, changes in best practices, different lines of communications and approvals can adversely affect customer service and customer relationships, especially those built over time. For some clients the change will not be seamless.
Is industry consolidation, bad for the customer?
While the consolidation of Retail Electric Providers may provide benefits to the business on the supply side of the equation, it creates risks for end users going forward. By consolidating the number of players (most recently: Exelon/Constellation merger, and NRG/Reliant merger), there is the potential for less competition among the top tier suppliers. Nevertheless, there
has also been an increase in the number of new electricity and natural gas suppliers. Therefore, despite recent consolidation, we have not seen any negative effect in retail energy competition across the U.S. deregulated markets.
Conclusion
Direct’ s acquisition of Hess Energy Marketing did not come as a surprise to the marketplace as Hess marketing business had been for sale for quite some time. However, the merger
of these two companies creates opportunity and challenges for end users. The new company will have significant capabilities to provide both electricity and natural gas services, highlighting
the value of having a single source for all of an end user’s needs. While the acquisition can certainly create challenges, it may afford the new venture the opportunity to improve efficiencies down road, reduce duplication and invest in R&D just to name a few. Nevertheless, we must be careful that the consolidation in the energy industry doesn’t decrease the
competition in energy markets. The sale is expected to close in the fourth quarter, pending regulatory approvals.
