Energy

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

If you're on a sinking ship, keep an eye on the crew in case they're headed for the lifeboat.

Following the IPO of RWE's renewable, retail and grid activities on Friday, the German utility's CEO Peter Terium and other top executives are jumping over to the new company, called Innogy.

About 60 percent of Innogy's earnings come from regulated businesses -- meaning stable, predictable returns. Those renewable and grid assets should still generate cash in a decarbonized and decentralized electricity system, unlike RWE's dirty, aging lignite power plants.  

So with senior managers headed off, it's reasonable to ask whether RWE investors should do the same. The parent company has certainly sprung a few leaks. It was too slow to invest in renewables and has seen its fossil power earnings and share price decimated in recent years. German rival Eon announced a split in 2014, but RWE needed a year before deciding to follow.

Yes, the design of RWE's rescue plan benefited from having time to study what Eon was up to, and to refine it. Unlike Eon, it's managed to separate renewable assets from its nuclear liabilities (which give pension fund investors nightmares). And by doing an IPO, rather than a spin-off, RWE could sell more Innogy shares if it needs cash. It still owns about 75 percent of the new company.

Nevertheless, the "clean" subsidiary's 20 billion euro market capitalization is more than double the "dirty" parent's, which tells a story. 

Magic Trick
RWE looks undervalued following the Innogy IPO but investors should tread carefully
Source: Bloomberg

With wholesale power prices recovering this year, there will be some investors who wonder whether that gap is justified. But the uncertainty around RWE's nuclear liabilities and future earnings from fossil power generation, plus a holding company discount, explain much of the divergence. Furthermore, RWE scrapped its dividend last year and hasn't agreed a new policy.

In contrast, Innogy has committed to a dividend payout of as much as 80 percent of adjusted net income, the bulk of which will of course accrue to RWE for the time being. The new unit's prospective 4-5 per cent dividend yield is very attractive, at a time of negative rates.

It might offer a more secure berth.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net