E.On and RWE look for €60bn silver bullet

Germany’s two biggest electric utilities announced a tie-up last weekend that is set to reshape the nation’s energy sector and shake up renewables. You may have heard about it.

To re-cap, longstanding rivals E.On and RWE have agreed a complex €60bn asset swap that is poised to turn E.On into a company focused purely on networks and retail customers, and establish RWE as Europe’s third-largest renewables group.

Here are the details of the agreement.

E.On is set to buy a 76.8% stake in Innogy, RWE’s renewable energy subsidiary, including its grid & infrastructure and retail businesses. This is valued at €43bn.

Simultaneously, RWE is set receive a 16.67% equity interest in E.On, including its renewables business, and pay E.On €1.5bn in cash. RWE is also poised to keep Innogy’s renewables assets; its gas-storage business; and its stake in Austrian supplier Kelag. The assets handed over to RWE have been valued at €17bn.

And E.On could make a public takeover offer in cash to the shareholders of Innogy at €40 per share, which would value the remaining 23% at around €5bn.

The deal still requires approval from regulatory and competition authorities, who we are sure will look at the plan very closely. It is due to complete by the end of 2019.

We have been aware for many months about speculation over Innogy’s future but, even so, a tie-up between these two great rivals is a blockbuster story. And it is a story that has its roots in Germany’s energiewende. This is the country’s move to embrace renewable energy sources that became law in late 2010.

Germany's decision to focus on expanding wind and solar power has put pressure on the two groups’ core conventional power operations – and therefore their financial results. The companies reacted in similar ways.

In 2016, E.On spun off its conventional power operations into new subsidiary Uniper, keeping renewables, networks and customer solutions. And, in the same year, RWE spun off its renewables, retail, grid and infrastructure businesses into Innogy, while keeping its legacy coal business in RWE.

Despite this, both groups reported losses in 2016 and have been looking for ways to boost their fortunes. This led to E.On agreeing to sell 47% of Uniper to Finland’s Fortum in a deal that is yet to complete, and RWE looking at options for its 76.8% Innogy stake. That is how we’ve ended up with this €60bn transaction.

This deal is set to make E.On Europe’s largest network and energy retail group, with a regulated asset base of around €37bn; while RWE will end up as Europe’s third-largest renewables player, after Spain’s Iberdrola and Italy’s Enel, with a renewables portfolio of over 9GW. This would be made up of E.On Climate & Renewables’ 5.3GW wind and solar portfolio, and Innogy’s 3.9GW.

Specifically, wind would be a very large part of the green RWE’s portfolio. It would own 5.3GW of onshore wind farms and almost 2GW offshore, and with plenty of growth potential. Innogy has recently bought EverPower’s 2GW US wind portfolio, and taken full control of a 1.2GW project in the Dogger Bank zone and the 860MW Triton Knoll.

Not that everyone has been impressed with Innogy’s expansion plans. The clearest example is the exit of chief executive Peter Terium in December following concerns from investors that he had lost focus on profits in favour of overseas growth. Indeed, net profit fell from €1.6bn in 2016 to €908m in 2017, according to the annual results that it published this week. In that context, the opportunity to merge Innogy with the apparently more conservative E.On Climate & Renewables looks like a smart move.

But it won’t be simple, and there will be pain. E.On said it would look for up to €800m cost savings in both companies following the deal, including up to 5,000 job cuts. We don’t expect renewables to be the focus of these cuts, but they won’t be exempt.

There's also a long way to go before the deal concludes, but it looks set to overhaul the business models of both firms. The pair of them were arguably too slow to adapt to the energiewende – and this could just be the solution they were looking for.