Germany’s two biggest utilities strike a deal

WHEN Johannes Teyssen took control of E.ON in 2010, it was Germany’s second-biggest company after Siemens, an industrial giant. From its headquarters in chic Düsseldorf, the utility looked down on RWE, its longtime rival, based in Essen, a down-at-heel former coal-and-steel town 40 minutes’ drive away.

The illusion of superiority did not last. The following year Angela Merkel, Germany’s chancellor, reacted to the meltdown at Fukushima in Japan by starting a process to shut down Germany’s nuclear-power plants, on which both companies relied. Other aspects of the Energiewende, or energy transition, added to their woes, as lavish support for renewables clobbered the country’s wholesale electricity prices. The companies’ profits slumped, as did their share prices (see chart).

In 2016 E.ON recorded its biggest-ever loss, moved its headquarters from Düsseldorf to Essen, and reinvented itself as a renewable-energy business and a household gas-and-electricity supplier. It spun off its fossil-fuel-burning power plants into a related company, Uniper. RWE flipped the process, floating its renewables and network businesses as Innogy, in which it kept a 77% stake, while keeping the dirtier power-producing assets in-house.

These corporate chimeras are soon for the chop, as RWE moves upstream and E.ON downstream. On March 12th the companies revealed elaborate plans to shuffle about €20bn ($25bn) of assets. E.ON will become Europe’s largest operator of power grids by assets and of consumer-energy supply by customers (of which it will have 50m). RWE will be its third-largest producer of renewable energy, behind Iberdrola of Spain and Italy’s Enel.

Sam Arie of UBS, a bank, says that will enable them to embrace two “megatrends” reshaping the global energy industry: the falling cost of wind and solar power; and the rise of electric vehicles (EVs). RWE will gain sufficient scale to become a big producer of renewables. E.ON will take the lead in power distribution in a rich country, Germany, that could come to love EVs.

Their infant progeny will cease to exist. In a mostly cashless deal, E.ON will acquire RWE’s stake in Innogy and absorb it, cutting 5,000 jobs in the process. It has already announced the sale of its stake in Uniper to Fortum, a Finnish utility. RWE will acquire a restricted 16.7% stake in E.ON, as well as all E.ON’s and Innogy’s renewable assets. It will pay E.ON an additional €1.5bn.

The main criticism of the plan is that it should have happened two years ago. Uniper soared in value once spun off, but Innogy struggled. After a profit warning in December, it jettisoned its chief executive (and architect of the spin-off). Earlier this month it was rocked by an unexplained acid attack on Bernhard Günther, its chief financial officer. Yet without the initial spin-offs, it hard to see how the deal could have happened. Markets have reacted well, suggesting regulators and activist investors are not expected to put up a fight.

E.ON’s focus on pylons, poles and wires means that 80% of its operating earnings will come from regulated businesses, up from 65%. That will ensure stable earnings and chunkier dividends. The company expects €600m-800m a year of savings from the deal by 2022, offsetting the decline in its nuclear earnings. Mr Teysson describes it as E.ON’s “first real growth step for more than a decade”—in other words, the best news of his whole tenure.

RWE, a carbon-dioxide belcher whose lignite power plants tarnish the credibility of the Energiewende, becomes greener and more focused. Analysts said it gains more immediately from the deal, though E.ON will make up for that later with its expected future savings. Already RWE’s profits are recovering fast. Like E.ON, on March 13th it announced a bumper payout to shareholders. Consumers, who pay a high price for electricity in Germany, are unlikely to be squeezed any harder as a result of the transaction. For once this is a deal that looks good for everyone involved, including the planet.


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