German energy faces turbulence as CEOs prepare for deals

After last year’s unprecedented shakeup, anyone who thought the German energy industry was in for a quieter time 2017 is likely to be disappointed.

After the break up of the country’s two biggest utilities, there are more deals on the way. Engie SA of France is weighing a bid for Innogy SE, while its majority owner RWE AG is considering all options, including making acquisitions of its own. The utilities have appointed advisers to shape strategy in the new energy world where renewables are king.

“Once the genie is out of the bottle, with Engie looking at Innogy, even if that doesn’t happen, you’re going to have people thinking about similar transactions that may be possible,” John Musk, an analyst at RBC Europe Ltd. said Tuesday by phone from London. “You could see bigger deals.”

After decades of raking in handsome profits from an old model of generating power at big plants and shipping it via their own grids to the nation’s homes and factories, Chancellor Angela Merkel’s push for solar and wind has changed everything for the utilities. A plunge in power prices amid a renewables glut have forced record annual losses and the biggest companies have written down about $40 billion on the value of their plants since 2013.

The answer was splitting up RWE and EON SE, once among the biggest companies on the nation’s stock market. RWE in October listed a minority stake in Innogy. EON SE spun off its Uniper unit a month earlier, handing about 2 billion euros ($2.13 billion) worth of stock to shareholders.

“We examine all options, and all means all,” RWE’s Chief Executive Officer Rolf Martin Schmitz said Tuesday at a press conference in Essen, Germany, when asked about selling Innogy or a potential acquisition of Uniper.

No Pressure

All possible investments will be measured against the stable return and dividend outlook of Innogy, he said. “We’re under no time pressure and no selling pressure.”

While there is no underlying reason why there should be more mergers or consolidation in the industry, the emergence of Innogy and Uniper as separate companies “creates an opportunity for someone who is interested in pursuing a certain strategy,” said Deepa Venkateswaran, an analyst at Sanford C. Bernstein & Co in London. “This wasn’t there before.”

Engie, 29 percent held by the French state, is like many other European utilities trying to shift away from fossil fuels and give renewables a larger share in its portfolio.

In Germany, green output met 29 percent of power demand last year, unchanged from 2015, but up from 11 percent a decade earlier. On one day in May last year, renewable energy met almost all consumption.

Record Loss

Last month, RWE posted its worst annual net loss since at least 1949 and EON reported its worst result ever on Wednesday. The latter hired Goldman Sachs Group Inc. and Greenhill & Co. to shore up its defense in the event of a bid, according to people familiar with the matter last month. The company retained its renewables, grid and retail units and spun off trading and fossil fuel plants.

While EON kept its nuclear assets, a major uncertainty for any potential buyer was removed last year when Germany’s atomic operators agreed with the government to cover 23.6 billion euros for nuclear waste in the future after more than a year of talks.

Read more on the historic German nuclear deal here

Uniper is confident it can stay independent, Chief Executive Officer Klaus Schaefer told reporters on March 9 in Dusseldorf. EON and Innogy declined to comment.

Reasons to Merge

“When it comes to thermal generation in Europe right now, because it is really hard to make money” coal and gas plant owners are good candidates for some amount of consolidation, Meredith Annex, analyst at Bloomberg New Energy Finance, said by phone from London. Continuing high debt levels and a lack of cash at some utilities could still be the limiting factor, she said.

Goldman, which advised RWE on the Innogy spinoff, expects “large, game-changing” mergers and acquisitions in the sector because of low borrowing costs and stronger balance sheets, it said in its utilities outlook report in January.

RWE reduced its consolidated net debt by 11 percent by end of 2016 from a year earlier, while Uniper cut borrowing by 38 percent.

“Balance sheets have improved significantly pretty much across the board,” Musk said. “Management teams should be on the front foot now in terms of strategy — looking to grow their businesses or think about enhanced shareholder returns.”

About BloombergNEF

BloombergNEF (BNEF) is a strategic research provider covering global commodity markets and the disruptive technologies driving the transition to a low-carbon economy. Our expert coverage assesses pathways for the power, transport, industry, buildings and agriculture sectors to adapt to the energy transition. We help commodity trading, corporate strategy, finance and policy professionals navigate change and generate opportunities.
Sign up for our free monthly newsletter →

Want to learn how we help our clients put it all together? Contact us