What can we read into €402.5m Nordex sale?

German manufacturer Nordex this week announced it is set to sell a 2.7GW pipeline of European development projects to German utility RWE.

The portfolio is concentrated in France. It includes 1.8GW of wind projects in France at various stages of development, as well as 100MW of solar in France. The other 800MW is split between developments in Poland, Spain and Sweden.

RWE is set to pay around €402.5m for the assets and the deal, which is due to close by the end of 2020, could help return Nordex to profitability.

It still requires approval of French competition authorities, but they have raised few public concerns thus far.

For RWE, the motivation for the deal is clear.

The company last month concluded its huge restructuring with E.On, which finalised the creation of RWE Renewables and sealed the demise of Innogy. Buying a 2.7GW pipeline in Europe will help RWE Renewables to bolster its position in Europe while contributing to its target of investing €5bn in 4GW of wind and solar globally by 2022.

For Nordex, the deal has led to more speculation.

It isn’t news to our readers that turbine makers in Germany, including Nordex, have faced a challenging few years. Competitive auctions have squeezed profit margins, reduced deal activity, and led to high-profile restructurings and job losses. This has led to big changes in the market.

The best example is Senvion, which filed for insolvency in April 2019 and concluded the €200m sale of its onshore wind and servicing arm to Siemens Gamesa in early 2020. As of four weeks ago, the Senvion brand is no more.

In addition, Enercon has carried out financial restructuring; and Siemens Gamesa is facing challenges in its onshore unit too.

But we don’t see this €402.5m deal with RWE as driven by desperation.

Now don’t get us wrong. This is undeniably a handy cash injection for Nordex at a time when projects are being delayed and the company scrapped its 2020 financial guidance because of Covid-19.

Jose Luis Blanco, the company’s CEO, said in the statement about the deal that it would “strengthen the firm’s balance sheet”, and we are sure that concerns about profitability will have played a part in the transaction.

Even so, selling these assets to RWE isn't a major departure for Nordex. It feels like a continuation of the diversification strategy of the last six years.

Here’s the history. In October 2015, Nordex agreed to buy Acciona Windpower from Acciona for €785m. The deal closed in April 2016. This helped the Europe-focused Nordex to open up development and sales opportunities in emerging wind markets, and reduce its over-reliance on activity in Germany. It was a smart move that helped the firm to negotiate recent troubles in Germany better than it might have otherwise.

In that context, selling a portfolio of projects in lower-margin European markets so it can focus development activities on higher-margin markets elsewhere makes sense.

Building onshore wind farms in France is unlikely to offer Nordex the attractive profit margins that it is looking for, particularly when you factor in how difficult it can be to negotiate bureaucracy in the French permitting system. It feels like a sensible move to sell off these assets at a time where Nordex needs focus, not distractions. Blanco said this would enable it to “capture market opportunities” for its Delta 4000 platform.

We also don’t think this deal will do any harm to the company’s reputation in Europe, where it is rightly seen as a manufacturer more than a developer.

Yes, Nordex develops – and it has said it will continue to do so – but the French projects to us feel like legacy assets where there is minimal risk to selling them. It has done similar deals before.

We’re not naïve about the challenges facing German manufacturers. Covid-19 is set to increase the financial pressure on firms already facing difficulties. There will undoubtedly be more restructuring before the pandemic is over.

But, this time, we just see a sensible strategic move in a difficult market.