March 12, 2018 / 3:41 PM / 6 months ago

Breakingviews - German energy carve-up generates good sparks

LONDON (Reuters Breakingviews) - The latest carve-up of Germany’s energy sector makes more sense than previous reshuffles. RWE is dividing up its ailing Innogy unit in a deal with rival E.ON. The former will focus on generating power, while the latter will specialise in distributing it. A knotty asset swap complicates the financial picture but the strategic thinking is hard to fault.

Innogy logo in Essen, Germany, March 14, 2017. Reuters/Thilo Schmuelgen - LR1ED3E0VI0BU

German utilities have spent the last few years dealing with the country’s decision to focus on renewable energy and scrap nuclear power. It’s barely 18 months since RWE spun off Innogy as a separate company concentrating on clean energy. That has been a failure. Innogy was as recently as Friday trading below the IPO price of 36 euros a share. The offering also failed to unlock much hidden value at its parent.

The latest deal, the broad outlines of which were announced on Sunday, is an attempt to reshuffle the assets of the three listed companies into two more logical packages. To start, E.ON will buy Innogy for 40 euros a share, including the dividends the company is due to pay this year and next. That values RWE’s 77 percent shareholding at 17.1 billion euros.

In return, RWE will receive E.ON shares worth 3.7 billion euros, based on last Friday’s closing price, and hand over 1.5 billion euros in cash. It will also take ownership of renewable energy assets controlled by both E.ON and Innogy, as well as stakes in nuclear power plants and other bits and pieces. Provided European competition regulators approve, both companies should share in cost savings that are estimated by people familiar with the transaction at 700 million euros a year.

Leaving aside the division of the spoils, both utilities have questions to answer. E.ON will end up with net debt of more than 40 billion euros, after factoring in pensions and other liabilities, though a shift to a more stable business model should support higher levels of indebtedness. RWE, meanwhile, will have to explain why it is absorbing renewable energy businesses that it spun out less than two years ago.

Nevertheless, the basic idea of dismantling and reassembling two energy suppliers so that they can each focus on a core skill makes sense. The bounce in the share prices of E.ON and RWE on Monday suggests that, despite the many uncertainties, investors agree.

Breakingviews

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