E.ON and RWE have proposed to reshuffle their business units in a complex mega-merger for Germany’s two dominant utilities, as they seek to adapt to the continent’s renewable-powered future.
As first reported by Bloomberg, E.ON is seeking to acquire all 76.8 percent of RWE’s majority stake in Innogy, the company it created in 2015 from its renewable generation, grid and energy retail businesses across Europe. E.ON would subsequently return the renewable energy portion of Innogy, along with its own renewable energy assets, or 16.7 percent of its equity, back to RWE.
Shares surged after the announcement. However, the deal still needs the approval of each company’s supervisory board.
The deal values Innogy at about €22 billion ($27.1 billion), although the amount may be nearly double when debt and other enterprise value is taken into account, Bloomberg quoted a source with knowledge of the deal as saying. Cash exchanged includes about €5 billion ($6.2 billion) for E.ON to buy out Innogy’s minority shareholders, and RWE paying E.ON €1.5 billion ($1.85 billion), with the rest of the deal valued in shares and asset swaps.
But the heart of the agreement is to give E.ON the retail and network businesses of both companies, and give RWE the combined renewable-generation businesses. This move would transform both companies, giving RWE a combined share in wind power second only to Iberdrola in Europe, and giving E.ON a share of the retail market that could raise antitrust implications in Germany, where the two companies are already dominant players, and in the U.K., where they are two of the six biggest retailers.
Innogy’s fiscal year 2017 earnings forecast released Monday did not mention the coming deal. But it did note that the company's grid business has been the main driver of 2017 earnings growth, up 14 percent to €1.9 billion ($2.4 billion), while the renewables division projects adjusted earnings before interest and taxes (EBIT) to fall 1 percent to €355 million ($438 million), and retail earnings to fall 5 percent year-on-year, to €800 million ($987 million).
The company is projecting overall adjusted EBIT of about €2.7 billion ($3.3 billion) and adjusted net income of over €1.1 billion ($1.36 billion).
Innogy sold 11.3 billion kilowatt-hours of electricity in the just-completed fiscal year, up 5 percent from 2016. Of this, 10.2 billion kilowatt-hours came from renewables -- 74 percent from onshore and offshore wind, 24 percent from run-of-river power stations, and 2 percent from biomass and solar PV plants. Fossil fuel still makes up about 10 percent of its capacity.
E.ON and RWE’s combined wind assets would put it just behind Iberdrola in terms of overall share in the Europe and Middle East market, compared to their respective No. 7 and No. 6 rankings today, according to Luke Lewandowski, analyst for Wood Mackenzie company MAKE Consulting. Innogy had been an investment target of interest for other European utilities including Engie, Enel and Iberdrola. Macquarie Group may acquire smaller businesses from the combined entity, including those in Eastern Europe -- a claim Macquarie declined to comment upon.
RWE and E.ON are making these massive reorganizations faced with the rise of wind and solar power in Germany and across Europe, which has undercut the markets and profits for fossil fuels and nuclear power plants. The Fukushima meltdown disaster in Japan prompted German Chancellor Angela Merkel to move to shut down the country’s nuclear power fleet by decade’s end.
Both companies have taken billions of euros in write-downs for those assets in the past several years, pushing RWE to create Innogy and E.ON to spin off its fossil fuel power plants in the form of Uniper. E.ON is in the midst of selling a 47 percent stake in its Uniper subsidiary to Finland-based utility Fortum.
The two companies have been active investors in renewable and distributed energy technologies. RWE launched a $144 million strategic venture capital fund in 2016, while its energy trading arm has invested in behind-the-meter battery startup Stem. Innogy has invested in organic solar cell startup Heliatek and blockchain energy trading startup Power Ledger, and both Innogy and E.ON have invested in energy disaggregation startup Bidgely. E.ON has invested in utility software startup AutoGrid, energy data analytics and visualization software provider Space-Time Insight, and battery control software and integration startup Greensmith (sold to Wartsila).