The Eon and RWE mega-deal

In what amounts to a massive asset swap, RWE and Eon are betting their futures on opposite ends of the energy value chain. Tom Grimwood looks at who gets what, and what will be left.

RWE and Eon are, or were until fairly recently, very similar companies. Both have strong historical ties to German industry and both are based in Essen in Germany’s old industrial heartland of the Ruhr Valley. Both have, or had, operations covering every link in the electricity supply chain in Europe – from generation to networks to retail – including large fleets of nuclear and coal-fired power stations.

Both have faced the massive challenge of repositioning their businesses in response to Germany’s seismic shift away from nuclear and fossil fuel generation towards renewables – known across the world as the “Energiewende” – as well as similar moves elsewhere in Europe. Both reacted by splitting themselves apart, creating two new companies in the process.

But in making these splits a difference began to emerge. RWE separated its retail, networks and renewables operations into Innogy, leaving the parent company with the legacy nuclear and fossil fuel activities. Eon took the opposite approach, spinning off its fossil fuel portfolio into Uniper, while retaining the renewable, network and retail operations (although, like RWE, it kept its nuclear fleet).

The huge asset-swapping deal between RWE and Eon announced last Sunday could now see their paths diverge almost completely.

RWE has agreed to exchange its 76.8 per cent stake in Innogy for a 16.67 per cent stake in Eon, as well as Eon’s renewable portfolio and €1.5 billion in cash. Innogy’s renewable division will be returned to RWE.

In accordance with Germany’s stock market regulations, Eon has also offered to buy out the other Innogy shareholders at a total value of €40 per share – consisting of an offer price of €36.76 plus projected dividends of €3.24 across 2017 and 2018.

Combined with the sale of its 46.65 per cent stake in Uniper to Fortum, the deal will leave Eon with no fossil fuel or renewable generation assets, allowing it to instead focus on retail and networks. On the flip-side, RWE will essentially become a generation company, with only a small stake in the retail and network sectors through its ­interest in Eon.

David Hatcher, partner for energy and resources at consultancy Baringa, sees two potential motivations for the deal. First, there is a greater benefit in specialising in particular parts of the value chain as opposed to historic vertical integration – from generation down to retail – and second, that “the future greater value stream lies at one end or the other, and that’s where they’re trying to gravitate their focus and attention”.

Hatcher tells Utility Week “…it’s not 100 per cent clear where the optimum value is going to lie in the generation through to retail value chain in the future market.

“The fact that Eon is moving downstream into the regulated networks and customer solutions space, and RWE is moving upstream, shows that two organisations are both placing bets at different ends of the market,” he adds.

“Very interestingly, RWE does get that slight hedge of the 16 per cent in Eon.”

According a joint press release from the two companies on Monday evening, it is the former rather than the latter. “Both companies are convinced that their positions in their respective core businesses can be further strengthened,” the statement reads.

“This strategic exchange of businesses will create two highly focused companies that will shape a better future for Europe’s energy landscape,” said Eon chief executive Johannes Teyssen.

In the UK, the deal will have a substantial impact on the renewables sector, where Eon and Innogy are by themselves relatively small players in the market. Eon has around 650MW of offshore wind capacity operating in the UK plus 250MW of onshore wind. It also owns a 50.1 per cent share in the 400MW Rampion offshore windfarm, which is due to be commissioned later this year.

Innogy currently has around 630MW of operational offshore wind and 340MW of onshore wind. It additionally owns a 25 per cent share in the Galloper offshore windfarm, which is nearing completion, and won a contract for difference in September for its 860MW Triton Knoll project with a strike price of £74.75/MWh.

The combining of these two portfolios would make RWE one of the largest ­players in the market, rivalling Orsted, SSE and ­Scottish Power.

But the most significant implications are for the retail sector, where Eon’s acquisition of Innogy is likely to raise concerns over its market power. Innogy owns the supplier Npower, which was revealed in November to be merging with SSE’s retail arm, turning the big six into the big five.

Based on the most recent figures from Ofgem, the merger would create the UK’s largest electricity supplier and the second-largest gas supplier behind British Gas, with market shares of 24 per cent and 19 per cent respectively.

The marriage, as proposed, would see Innogy take a 34.4 per cent stake in the business, with SSE demerging its 65.6 per cent stake to its shareholders upon completion.

Eon has said it plans to integrate Innogy into the parent company, ending its short-lived existence. This could eventually leave Eon with stakes in two of the new big five suppliers, which together would have electricity and gas market shares of 37 per cent and 31 per cent.

The Competition and Markets ­Authority (CMA) has already opened an investigation into the SSE-Npower merger. Analysts at investment firm Jefferies say Eon’s future ownership of Npower “could make obtaining the necessary regulatory clearance more complex”.

Nevertheless, SSE and Npower have both insisted that the merger remains on track.

“The deal was already under scrutiny from the CMA so I’m not sure it really changes the level of scrutiny,” says Hatcher. “It probably just means some additional remedies may be imposed, being that now you’ll potentially have three of the big six involved together.”

Speaking to Reuters, associate at consultancy Cornwall Insight, Peter Atherton, said if the CMA is unhappy with the merger as it stands, one workaround could be for Eon to sell down its share in the new company.

“We haven’t seen any indication Eon wants to do that, but if [the SSE-Npower merger] is a stumbling block for the wider deal then that is a logical solution,” he told the news agency.

For now, we can only wait and see how it all plays out.