Germany's two big utilities Eon and RWE have been through a kind of living hell in recent years, battered by a slump in wholesale electricity prices, the switch to solar and wind power and Angela Merkel's decision to shutter her nuclear industry.
Eon sought therapy first. Last year, it announced plans to spin off its conventional power generation, energy trading and exploration and production units to shareholders so it could focus more on renewables. Eon shares have since outperformed RWE's, even though it made a 7.3 billion-euro third-quarter loss caused by impairments.
On Tuesday, RWE swallowed its pride and announced a similar shift -- with a few important differences. It's had time to assess Eon's plan and refine it.
The utilities' problems are well documented: on some windy and sunny days conventional power plants are barely needed in Germany, making it nigh on impossible to run them profitably.
Overcapacity and weak power demand have caused electricity prices to fall. The utilities are burdened by the vast costs associated with closing Germany's nuclear power plants. The total shareholder return at RWE over five years has been a negative 70 percent, according to Bloomberg data, compared to minus 47 percent at Eon and a 41 percent gain for the Stoxx Europe utilities index
Rather than splitting into two separate companies, RWE is bundling its renewable, grid and retail activities into a new subsidiary. It will sell a 10 percent stake in that business in an initial public offering in late 2016. Although the parent will probably cut its holding over time, the old RWE will keep a majority and consolidate it fully.
This is a tidy solution. RWE was slow to go green and has only 3.5 gigawatts of renewable capacity, about 8 percent of its total. By comparison, hard coal and lignite represent about 40 per cent of RWE's capacity.
Half the IPO proceeds will be used to fund growth in renewables, including building a "utility-scale" solar business. RWE shareholders have been unwilling to ascribe much value to the renewable and grid assets, given the company's array of other problems. And some big investors such as Allianz and Norway's wealth fund are now refusing to invest in companies that rely heavily on coal.
So the hope is the new entity will be more attractive to those repelled by RWE's dirtier activities and at the same time capture a higher multiple for a business obscured by the mess elsewhere. That's helpful given those nuclear phase-out costs.
And this kind of thing has borne fruit elsewhere. Italian spin-off Enel Green Power trades on 24 times this year's expected earnings, according to data compiled by Bloomberg. EDP Renovaveis in Portugal is on 40 times. The RWE offshoot's net debt will be up to 3.5 times Ebitda, in line with peers.
RWE has been slower than others to reach this decision, but it's hard to see where it could have gone otherwise. The 17 percent rise in its shares on Tuesday may be the first glimmer of light in Hades.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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