RWE's U-Turn on Splitting Forced by Merkel's Love of Green Power

  • Flailing shares have restricted access to capital markets
  • Plan ``is paving the way to renationalization'': Metzler

It took RWE AG a whole year and a 63 percent decline in its share price to come to its senses.

On Dec. 1 2014, the day after German competitor EON SE announced it was splitting into two independent companies, the country’s biggest power producer said it had no such plans. In an about-turn on Tuesday, reeling from a 29 percent profit decline in the nine months through September and facing the specter of impairments, RWE said it’s pooling its renewables, grid and retail operations into a separate company, part of which it will sell in an initial public offering at the end of next year.

Chief Executive Officer Peter Terium is embracing the survival strategy adopted by EON as Germany’s shift to renewable energy forces utilities to expand beyond the traditional power-generation model built on fossil and nuclear fuels. Chancellor Angela Merkel plans to increase the nation’s share of alternative energy to as much as 60 percent of total demand within 20 years, compared with about 33 percent estimated for 2015.

A threefold increase in renewable energy supply in the past decade has pushed wholesale power prices to the lowest since 2003, squeezing margins at conventional power stations. Adding to the burden are provisions for nuclear decommissioning that companies must set aside as the country shuts down all reactors by 2022.

It “will leave RWE as a much more viable company that can invest in renewables and grids,” and is the best option, Deepa Venkateswaran, an analyst at Sanford C. Bernstein Ltd. said by e-mail.

Essen-based RWE plans to list about 10 percent of the new company in connection with a capital increase, subject to approval by its supervisory board at a meeting on Dec. 11. Additional stakes may also be sold, although RWE plans to retain a majority stake in the longer term, in contrast to EON’s plan to split itself into two independent companies.

Tuesday’s plan “is paving the way to renationalization,” said Guido Hoymann, an analyst at B. Metzler Seel Sohn & Co. KGaA. “RWE may put the new company or parts of it in an atomic foundation” that could be established by nuclear plant operators and the German government to cover atomic decommissioning costs at a later date, he said, adding that such a step would “could influence dividend payments.”

Investors cheered the proposal, with RWE shares rallying 17 percent in Frankfurt on Tuesday before decreasing 1.8 percent to 12.47 euros by Wednesday’s close. RWE remains the laggard on Germany’s benchmark DAX Index this year, losing 51 percent of its value, while EON has fallen 37 percent, compared with a 14 percent index gain.

Flailing Shares

The flailing shares have stymied Terium’s efforts to bolster the cash flow he needs to kickstart a turnaround at RWE as talks this year to sell a stake to an unidentified Abu Dhabi investor failed over price.

A sale to an anchor investor would have been RWE’s only other option to generate cash, besides directly selling grid or renewable assets, and wasn’t a step favored by analysts, including Bernstein’s Venkateswaran.

RWE has held talks with potential strategic investors and investment banks including Macquarie Group Ltd. to sell additional shares in the new company, according to a report in Handelsblatt on Wednesday, citing unidentified people at RWE.

RWE will be able to repair its balance sheet by selling a 15 percent stake in the new company for about 3 billion euros ($3.2 billion), analysts at Macquarie said in a note to clients on Wednesday. They raised their rating on the stock to “outperform” from “neutral.” Concerns about capital “are no longer justified,” the analysts wrote.

Rating Pressure

Operating profit from RWE’s conventional power generation fell by more than half in the first nine months of the year to 376 million euros and has slumped more than 80 percent since 2012.

RWE, which has more than 23 million household customers in 12 countries, estimated 2015 earnings before interest, taxes, depreciation and amortization for the new company at 4.3 billion euros to 4.5 billion euros, compared with 6.1 billion euros to 6.4 billion euros for the current group as a whole.

The restructuring plan “is our response to the transformation of the European energy landscape,” Terium said in Tuesday’s statement. In retaining a majority stake in the new company, RWE remains “convinced that conventional power generation will remain an irreplaceable partner for renewable energy for decades to come. Our conventional power stations are the backup for renewables,” he said.

RWE’s 3.7 gigawatts of renewable generation accounts for 8 percent of the total group capacity, while more than 40 percent of its production is based on coal and lignite plants, according to figures on the company’s website.

The new company will encompass more than 40,000 employees, or about two-thirds of RWE’s current total, and have sales of about 40 billion euros, Terium said on a call with reporters on Tuesday.

“This is no startup,” he said.

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