RWE Shareholder Revolt Shows Battleground Widening for CEO

  • RWE facing difficult negotiations over new municipal contracts
  • Symbiotic relationship ensures power supply to Ruhr region

For the best part of a century, RWE AG has had its municipal shareholders on its side. As Germany’s largest power producer suspends dividend payments and now prepares to split itself up, the local authorities that own 24 percent of the company are threatening mutiny.

RWE AG’s full-year net loss isn’t the only bitter pill local stakeholders have to swallow when Chief Executive Officer Peter Terium comments on the company’s 2015 earnings on Tuesday. Canceling dividends for the first time in more than 50 years means less funding for local schools, hospitals and refugees seeking shelter in the company’s home town of Essen and the surrounding region. 

Just as painful is their waning influence on RWE’s supervisory board since first gaining representation in 1898 when the company was established and rising to become the majority shareholders in 1920. Several top personnel decisions have gone against their wishes, including the man chosen to succeed Manfred Schneider as head of the supervisory board, Werner Brandt over Werner Mueller, the candidate favored by the municipalities.

“There’s a huge discord between Terium’s declaration of how important municipal shareholders are to him and his actual behavior,” said Ernst Gerlach, a director at Verband der kommunalen RWE-Aktionaere GmbH, which represents municipal shareholders. Their mood “ranges from aggressive to deeply disappointed,” he said in a phone interview from Essen.

RWE declined to comment on the relationship with its municipal shareholders.

Squeezing Margins

Power prices at their lowest level since at least 2002 and Germany’s shift to renewable energy are squeezing margins at conventional coal and gas plants in Europe’s biggest power market. Utilities are also putting billions of euros aside to pay for the country’s exit from nuclear power by 2022. RWE’s competitor EON SE, which reports earnings on Wednesday, is also splitting in two and reviewing investments and dividend policy to overcome the industry slump. The company plans to sell a majority of its fossil-fuel business in the second half of this year.

RWE is also planning job cuts at its Npower unit in the U.K., a person with direct knowledge of the matter said Monday. Less than 2,500 people at the company will be impacted, according to the person.

With more than 150 local supply contracts due to be renegotiated by the end of next year, Terium is cutting RWE’s municipal shareholders loose at a time when the company can ill afford to lose business. The symbiotic relationship is one that has ensured power supply for more than a century to industries and households in Germany’s industrial heartland and most populous state. North Rhine-Westphalia is bigger than Belgium and has an economy comparable in size to Switzerland.

Shareholders may have to wait four or five years for Terium’s turnaround plan to work, Nadege Tillier, senior credit analyst at ING Groep NV, said in an interview in Amsterdam.

RWE Shrinking

“The problem is that the company is still shrinking. The growth story could start again when the business model is more geared toward renewables that earn three to four times more for their electricity than conventional plants,” said Tillier. “It might be difficult to reiterate a dividend suspension next year as pressure from municipal shareholders will increase.”

Terium plans to spin off RWE’s renewable energy, grids and retail operations into a new entity to be listed on the stock market by the end of this year. RWE will have a stake of about 90 percent in the new company. He’s also on the hunt for new growth opportunities from Egypt to the U.S. and last month set up several collaborations with startups in Silicon Valley, where he plans a 130 million-euro ($143 million) venture capital fund.

Meanwhile, the municipal shareholders are threatening revolt.

“It will become more difficult to keep the supply contracts,” Wolfgang Schaefer, a director at Verband der kommunalen RWE-Aktionaere Westfalen GmbH, said in a phone interview from Dortmund. “We still can’t see the business model. The app to switch off an iron remotely that Terium brought from Silicon Valley isn’t enough.”

Their dependence on RWE is real.

Lower Budget

Lars Martin Klieve, the treasurer of Essen, said the suspension of the dividend leaves him with 9 million euros less in his budget, which he has recently supplemented to cater for the 6,000 refugees that the city is accommodating as migrants fleeing wars and conflict flock to Germany. Klieve had “conservatively” calculated a dividend cut of 50 percent in his budget, he said.

Nearby Dortmund, Muelheim and other municipalities in the Ruhr region are also heavily reliant on the dividend for funding.

The slump in RWE’s shares is also taking its toll. Essen wrote down more than 800 million euros on its 3 percent stake in RWE over the last three years as the stock fell 63 percent.

While the municipalities stand to profit from the growth prospects presented by the new company, their influence will shrink even more as their stake will only be an indirect one.

“RWE is the organization we chose in our legal mandate to ensure basic supplies,” Gerlach said. “That’s now all called into question. For us that’s not only a fiscal problem but also a strategic problem.”

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