RWE Said to Plan $11 Billion in Asset Sales; Shares Climb

RWE Said to Plan $11 Billion in Asset Sales
The RWE AG logo is seen at the company's brown coal open cast mine in Weisweiler. Photographer: Hannelore Foerster/Bloomberg

RWE AG plans to sell about 8 billion euros ($11 billion) of assets, starting with its German power network, as the country’s second-largest utility cuts debt, according to two people with knowledge of the matter.

RWE is in talks to sell a majority stake in its Amprion grid in Germany to a group of investors led by Commerzbank AG, said the people, who declined to be identified because the plan is confidential. The Essen-based company may dispose of assets in the U.K., one of the people said. RWE is scheduled to update investors on its strategy on Feb. 24 after supervisory board meetings this week.

RWE, led by Chief Executive Officer Juergen Grossmann, and its biggest competitors in Germany will see their earnings sliced by Chancellor Angela Merkel’s plan to tax nuclear power plants to help plug the budget deficit. E.ON AG and Vattenfall AB have sold power lines in Germany to satisfy European Union regulators, reduce debt and save on spending.

“The German nuclear tax is really the decisive factor for RWE’s disposals,” said Peter Wirtz, an analyst at WestLB AG in Dusselfdorf. “The tax saps cash flows, and RWE’s earnings aren’t rebounding as fast as they had expected.”

RWE rose 0.5 percent to close at 52.50 euros in Frankfurt, valuing the company at about 29.5 billion euros. The shares have lost 19 percent in the last year.

Nuclear Tax

Germany’s planned 2.3 billion-euro nuclear fuel tax and contributions to a government-run renewable energy fund will cut RWE’s annual recurrent net income, which it uses to calculate its dividend, by 500 million euros starting in 2011, the company said in September.

“Utility shares were really ploughed into the ground last year,” Thomas Deser, a Frankfurt-based fund manager with Union Investment, said earlier this month. “The horror scenario that has been priced into the German utility stocks may have been largely theoretical.”

Union Investment has more than 170 billion euros of assets under management including more than 1 percent of E.ON and RWE respectively.

RWE may reach a deal on selling as much as 75 percent of the Amprion network company by April if the parties can agree on the profits they stand to earn, the people said. The Commerzbank-led investor group, which could have as many as eight members, wants to fix its return over the next 10 years, said the person. The grid may be valued at 2 billion euros including debt, said WestLB’s Wirtz.

‘Vale of Tears’

RWE is considering institutional investors as partners in its extra-high-voltage grid to share investment costs, spokeswoman Annett Urbaczka said in an e-mail. She declined to comment further. Commerzbank spokeswoman Sandra Fohlmeister declined to comment.

“RWE may say this week that while the company will go through a vale of tears it will come out and do well in three years,” said Michael Schaefer, an Equinet AG analyst with an “accumulate” recommendation on the stock. “The question is whether investors will go with them.”

Schaefer said he expects RWE to sweeten shareholders by setting an annual dividend floor of 3.10 euros share for the period through 2013 and pay 3.50 euros for last year, unchanged from the payment for 2009.

In the U.K., RWE’s npower unit produces about 8 percent of the country’s electricity and serves about 6.7 million residential and business customers. RWE paid 5.2 billion pounds ($8.6 billion) for Innogy Holdings Plc, now npower, in 2002.

Fixed Returns

RWE may focus on selling holdings in German municipal utilities and eastern European assets as it currently “isn’t a good time” to sell power generation assets because of a squeeze in profits from burning fuels to produce electricity, said Schaefer, who is based in Frankfurt.

The fees German power grid operators can charge are determined by the Bonn-based Federal Network Agency, the industry’s regulator, which makes fixing the return for the prospective investors in Amprion more difficult, said the person.

RWE may sell a stake in Amprion to a company that doesn’t compete with RWE in power generation or transmission, such as a financial investor, a person familiar with the matter said in October. RWE wants to maintain the division as part of the company and remain the operator of its assets, the person said at the time.

Antitrust Approval

Amprion has an 11,000-kilometer (6,840-mile) grid that supplies about 27 million people in western and southern Germany, according to its website. The division, which is based in the German city of Dortmund, had 5.7 billion euros in revenue in 2009, according to RWE’s report on the period.

Dutch electricity-grid operator TenneT BV won European Union antitrust approval to buy E.ON’s network for 1.1 billion euros in February last year. Elia System Operator NV, Belgium’s high-voltage grid operator, and Industry Funds Management Ltd. won EU approval for their 810 million-euro purchase of Vattenfall’s German power lines in May.

“Insecurity is never good for a stock,” said Deser at Union Investment. “RWE probably won’t have a firework of a share price, but there may be a stabilization” after the strategy day. “Grossmann will be able to show that the company still has a strong dividend and that it can pick itself up when energy prices rise.”

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