EON Emerging Markets Foray to Cut Profit as Russia Slows

Germany’s largest utility sought relief from upheaval in the energy industry at home by investing in emerging markets. It’s not gone to plan.

EON SE reports first-half earnings tomorrow and ventures in Brazil, Turkey and Russia are expected to contribute to a 24 percent drop in profit from last year, according to analysts including B. Metzler Seel Sohn & Co. KGaA.

The company has challenges in all three countries, picked because they were held to offer better growth than Europe. In Brazil, investments earmarked for utility Eneva SA have risen almost fourfold as the business of billionaire partner Eike Batista collapsed. Earnings at Turkish venture Haci Omer Sabanci Holding AS have been held back by a weak currency, and Russia’s economy is slowing because of the Ukraine crisis.

“A higher risk is in the nature of emerging markets,” said Thomas Deser, a fund manager at Union Investment, a top-10 shareholder, adding EON’s history of investing outside Europe lagged behind competitors including GDF Suez SA. “Lack of experience can lead to a lot of expensive errors.”

EON closed down 1.5 percent at 13.165 euros in Frankfurt.

In the first quarter, earnings before interest, taxes, depreciation and amortization outside the European Union plunged almost by half to 105 million euros ($141 million). As the economy deteriorates in Russia, that’s unlikely to have improved in the second quarter.

Turkey Expansion

Having been involved in Russia since 2007, EON announced its expansion to Turkey and Brazil five years later. It has seen the countries as platforms for future growth as Germany’s shift toward subsidized renewables and away from nuclear cut power prices already weakened by slow European economic growth.

The investments in Brazil multiplied to about 1.3 billion euros from the originally planned 350 million euros, in Turkey they totaled 2.7 billion euros and in Russia about 10 billion euros, including gas production and the 800 megawatt Berezovskaya plant to be commissioned next year.

The three countries currently are “no growth driver,” said Sven Diermeier, an analyst at Independent Research GmbH who sees political risks in all of them. Brazil and Turkey will start to contribute to earnings in three years at the earliest, he said.

In Russia, the Ukraine crisis, which has seen U.S and Europe impose sanctions on Russian business, may cause energy demand to drop and weaken the currency, Diermeier said in a phone interview from Frankfurt.

Driving Force

EON expects “Russia to stay the main driving force for our Ebitda in non-EU countries”, benefiting from starting operations in Berezovskaya, spokesman Alexander Ihl said by e-mail. Medium-term in Turkey “we maintain a positive view on the market as it is getting more and more liberalized” and in the long-run Brazil has “high potential for growth.”

For first half, EON’s estimated to report a 24 percent decline in adjusted net income from a year earlier to 1.46 billion euros, according to eight analysts surveyed by Bloomberg.

The company’s previous international forays haven’t always paid off. It had to write down billions of euros on assets in Spain, Italy and France bought from an Acciona SA-led group for more than 11 billion euros in 2007.

“The negative analogy is that it let itself get carried away to large-scale investments by growth forecasts and was then confronted with an economic downturn contrary to its expectations,” said Guido Hoymann, an analyst at B. Metzler Seel. “A withdrawal from the emerging markets with losses after a few short years would be a drama and a waste of resources.”

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