German utilities weigh M&A as Goldman sees game-changers

Germany’s largest utilities split themselves up last year, cleaving retail and renewable businesses from struggling fossil-fuel operations. In 2017, the new companies are looking at consolidation.

EON, which will probably announce a record loss for 2016 in March, has discussed with advisers a potential combination with RWE AG’s clean-energy business unit Innogy SE, two people familiar with the matter said, asking not to be identified as the information is private. European utilities outside Germany are also eyeing potential takeovers of Innogy or EON’s fossil-fuel spinoff Uniper SE, they said.

EON and RWE were once among the biggest companies in Germany. But Chancellor Angela Merkel’s shift toward an economy underpinned by renewable energy instead of nuclear and fossil fuels, has sent wholesale power down by about 50 percent since 2011, resulting in combined writedowns of almost 30 billion euros ($32 billion).

“In Europe, we’ll see and need further consolidation short-term,” Innogy Chief Executive Officer Peter Terium said Tuesday in an interview in Berlin. “We’ll need it in generation as there certainly is excess capacity and it can only be sensibly tackled in an integrated approach,” he said.

RWE said it is not in talks with EON on the disposal of Innogy shares. EON and Uniper declined to comment on the potential for deals involving them.

EON shares rose as much as 1.6 percent to 7.393 euros, the most in a week, and traded at 7.339 euros at 4:48 p.m. in Frankfurt. Innogy fell 0.3 percent to 32.19 euros after earlier rising as much as 0.9 percent.

Goldman Sachs Group Inc., 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, the bank said in its 2017 utilities outlook this month.

Read more about the main challenges for Germany’s utilities this year

Deals involving Innogy and Uniper could materialize as early as this year, said the people. Discussions are at an early stage and no final decisions have been taken, they said.

Uniper gained more than 30 percent since it started trading in September in Frankfurt as energy markets have recovered. Because its performance is so strongly linked to the wholesale markets, the company will be “at the core” of the next phase of consolidation, Goldman said. Innogy was listed in October last year in Europe’s largest initial public offering since 2011.

RWE holds a 77 percent Innogy stake and has said it will keep a majority of the unit, while it may sell further shares as early as April when the lock-up period following the IPO ends.

A merger would boost the energy supply business of the two companies because of the economy of scale, said Elchin Mammadov, an analyst at Bloomberg Intelligence in London. A merger may be possible in 2018, although EON’s nuclear liability is a potential roadblock to any deal, he said by e-mail.

Deepa Venkateswaran, an analyst at Sanford C. Bernstein & Co. in London, is not convinced about the rationale for an Innogy and EON merger. It would reverse their strategy of becoming smaller and more focused, she said Wednesday. It may also negate their cost-cutting efforts and raise competition concerns, she said, also doubting there would be buyers for Uniper.

“It’s not like utilities outside of Germany have a lot of money and they’re just walking around to buy,” she said.

Terium said he hasn’t heard anything about a tie-up between EON and Innogy.

“We don’t need a significant strengthening,” he said. “We can do well based on organic growth.”

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