Germany’s top two energy players, Eon and RWE, have been dreadful share price performers since the onset of the financial crisis in 2008.
In the intervening decade, a combination of low generation prices, the close-down of all nuclear power plants in Germany by 2022 and high net debt have provided immense challenges.
After recent restructuring by both companies, a new deal has now been announced, whereby Eon is buying Innogy, in which RWE currently has a 76.8 per cent stake: this deal values Innogy at c€22 billion.
In return, RWE receives a 16.7 per cent equity stake in Eon’s expanded business. Whether in time this key stake is a prelude to a full “national champion” merger remains to be seen.
Assuming the deal proceeds without major changes – quite a big if – Eon will become highly dependent on the energy retail market and networks provision: the latter will be a key cash earner.
Significantly, Eon recently sold its 47 per cent stake in Uniper, primarily a generation business, to Finland’s Fortum.
For RWE, apart from the notable boost to its finances and its dividend payment capability, there will be an element of returning to its generation roots in the Ruhr.
RWE remains Germany’s leading power generator, with a portfolio of fossil-fuelled plants, which will be supplemented by Innogy’s renewable generation business.
By 2022, all nuclear plants in Germany are scheduled for closure following the highly controversial decision by Chancellor, Angela Merkel, to abandon nuclear power generation following the Fukushima disaster.
The proposed deal throws up a raft of issues.
First, how will the various regulatory processes be navigated?
The German establishment will, no doubt, be keen for the deal to proceed – a big plus. But there will be questions surrounding competition and likely job losses.
Secondly, Eon’s initiative raises various questions about the SSE/Innogy deal that was announced in 2017 – and has still to be completed. To date, SSE has said little.
In any event, the UK retail energy businesses of both Eon and RWE/Innogy overlap, as they do in Germany. Hence, substantial job cuts look likely.
Furthermore, there is bound to be a reassessment of the various overseas assets, including generating assets, that Eon and RWE – either directly or through its 76.8 per cent Innogy stake – currently own.
Lastly, it would be premature to rule out other bidders seeking to break up the cosy German power party. Unlikely but not impossible.
Despite these uncertainties – and many others – the markets have so far responded positively to the deal.
Not surprisingly Innogy’s share price soared on the back of the deal – it is up 13 per cent on the day so far: Eon’s has risen by a more modest 4 per cent.
It is very early days in what may be a long corporate saga, as various interested parties get into the act. Whilst many issues have already been squared, others have not.
But, after a desperately difficult decade, perhaps today’s announcement heralds light at the end of the tunnel for Eon and some much-needed good news for the beleaguered RWE.