RWE Split Favored Over EON’s in German Utilities Overhaul

  • Renewables unit of RWE preferred by most in Bloomberg survey
  • German utilities splitting in riposte to nation’s green policy

Germany’s decade-long shift toward green energy is forcing executives to carve up the nation’s two biggest utilities, and analysts and investors see a clear winner.

As RWE AG and EON SE, once among Germany’s most valuable companies, plan to sell shares, RWE’s path is favored by most of the 16 participants in a survey conducted by Bloomberg this month. Ten analysts and investors preferred the utility’s newly separated renewables, grid and retail unit over the similar business left after the split of EON, which was favored by one. The rest of the respondents were undecided.

By separating their conventional plants from renewables, the utilities aim to counter the impact of Germany’s shift toward wind and solar generation, a policy that helped drive wholesale electricity prices to the lowest in more than a decade. RWE’s new company will only contain its green power, network and customer businesses, while EON is keeping its German nuclear operations and their cleanup liabilities with its renewables enterprise as it spins off its fossil-fuel units.

“RWE sells the future, EON sells the past,” said Thomas Hechtfischer, director of the Deutsche Schutzvereinigung fuer Wertpapierbesitz shareholder association, who favors RWE International SE, the working name of the new company, over EON. But as an existing shareholder, “I prefer to have the future in-house,” he said.

Investor Day

RWE intends to sell about 10 percent of the new company in an initial public offering this year. While more stakes may be offered, it will keep a majority. The Essen-based utility is expected to reveal more details of its plan at an investor presentation in London on Thursday.

EON, under a strategy first unveiled in 2014, shifted its fossil-fuel plants and trading into a company called Uniper on Jan. 1 to focus on renewable energy and networks. It plans to distribute 53 percent of Uniper to existing shareholders before eventually selling the remaining stake.

EON and Uniper, with their clear focus, are well placed to be successful, said Christian Drepper, a spokesman for EON, who highlighted the more than 99 percent approval of the spinoff at the company’s annual general meeting this month. Sabine Jeschke, a spokeswoman for RWE, declined to comment.

The utilities’ shares were roiled last week with other markets as Britain voted to leave the European Union, a move that RWE said would have only a minor effect on its business and that EON described as “manageable.”

RWE, raised to buy from hold at Societe Generale SA, led gains in the German benchmark DAX index on Tuesday, advancing 4.7 percent to close at 12.705 euros a share in Frankfurt. The stock has risen 17 percent since it revealed the new structure on Dec. 1, the second-best performer in the stock benchmark that lost 17 percent in the same period. EON dropped 7 percent.

Fresh Capital

RWE is seeking to raise fresh capital from the new unit’s listing to strengthen its balance sheet. Germany’s largest power generator had its debt cut to one step above junk by S&P Global Ratings this month.

“RWE has a limited capacity to invest at this stage,” Elchin Mammadov, an analyst at Bloomberg Intelligence, said by phone from London. He prefers the new EON as it “is much more active and diversified and much more advanced with its IPO.”

EON’s breakup lost some of its attraction when it had to cancel the original plan to include German nuclear plants in Uniper after the government took steps to keep utilities from avoiding their atomic waste cleanup obligations.

The new EON’s “birth defect is substantial and is probably a no-go for most investors oriented toward sustainability,” said Holger Fechner, an analyst at Norddeutsche Landesbank.

EON, RWE and other utilities will probably have to pay about 23 billion euros ($25 billion) to cover radioactive waste storage costs as the nation exits nuclear generation by 2022.

“The most important distinction is that the atomic burdens are to remain with EON,” Peter Crampton, an analyst at Macquarie Group Ltd., said by phone. “RWE got it right to wait and see how EON went to the wall.”

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