A decade ago, Eon SE and RWE AG were two of Germany’s most valuable companies and their businesses were roughly similar: they generated power (much of it from coal and nuclear), ran energy networks and sold electricity to end consumers.
The complex asset swap and share issue they announced over the weekend -- including the divvying up of RWE-controlled Innogy SE’s assets -- is the last death knell for that all-encompassing model. Eon will become a company focused purely on energy networks and retail customers, while RWE will combine the two companies’ renewables businesses.
Each company heads off in a clear strategic direction, without needing a heavy cash outlay, and investors will get the chance to pick which model they prefer: one that’s essentially a buyer and distributor of energy (Eon) or one that’s a producer (RWE). Buying out the minority shareholders who own about 23 percent of Innogy will cost Eon about 5 billion euros ($6.2 billion), but it will get 1.5 billion euros cash from RWE in return.
Inexpensive or not, it’s natural to be confused by yet another upheaval in German utilities. It’s not even two years since the beleaguered RWE and Eon told investors that salvation lay in splitting their fossil power and renewable energy activities. This was in response to plunging wholesale power prices and Germany’s decision to shutter their nuclear power plants.
But both ended up with companies that lumped together the networks and retail businesses with renewables. It never quite felt like a permanent solution. In Innogy’s short life, it’s already warned on profits and parted company with a CEO.
The challenges for traditional utilities are myriad, so it makes sense for them to try to simplify where they can. Renewables projects are subject to huge price pressure. Battery storage and decentralized power generation are going to transform electricity networks. Meanwhile, energy efficiency is curtailing how much electricity we use, but utilities are still having to pay for electric vehicle charging infrastructure -- which may cause demand to spike eventually.
Elsewhere, technology is making it much easier for people to switch to a new supplier, including nimble new entrants. So incumbents are having to offer retail customers better deals, pressuring returns. The politics often remain tortured, such as in the U.K. where the government threatens to cap electricity bills.
This deal is Eon and RWE’s way of admitting that it’s better to only have to solve some of these problems, not all of them. Eon’s expanded retail business should let it generate decent cost savings. RWE, which was slow to develop renewable assets, can scale up in solar and wind -- in case Germany one day decides its coal plants should meet the same fate as its nuclear reactors.
Plus RWE gets a minority stake in Eon via a capital increase, which it can sell if needed, or it can use Eon’s dividends to help fund nuclear decommissioning liabilities.
This isn’t yet a done deal, of course. Innogy’s minority investors may gripe about the small premium to buy them out -- 16 percent on Friday’s close. Regulators will need convincing too, especially in Britain where the number of big household energy suppliers is dwindling. Innogy’s Npower unit already plans to merge with SSE Plc. Still, German politicians will be pleased if Innogy doesn’t fall prey to a foreign buyer.
If Eon and RWE can prevail, other utilities may decide to follow. Utility investors would then be able to decide what future they believe in: a world where solar and wind energy is cheap and so what matters are cash-generating networks and end-customers (Eon). Or one in which the whole economy is electrified and the electricity generator is king (RWE). At least we’d have a choice.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.
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