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EON-Innogy Energy Deal Could Spark Regulatory Power Struggle

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  • National, EU regulators may quarel over who reviews merger
  • EU could cede review as transaction mostly concerns Germany
EON, RWE Agree to $27.1 Billion Innogy Deal

EON SE’s 22 billion-euro ($27.1 billion) bid for Innogy SE could spark political sparring between two of Europe best known antitrust officials who may both want to review the deal that’s set to transform Germany’s energy industry.

While mergers of this size typically go to the European Union’s antitrust division, headed by Margrethe Vestager, national agencies can seek jurisdiction when they mainly affect a single country. That may mean that Andreas Mundt, president of Germany’s Federal Cartel Office, who has previously asked to oversee big telecoms deals, might make another try here.

Mundt’s “Bundeskartellamt will use all the tools in its box to have the deal reviewed nationally, in Germany," said Peter Gussone, an antitrust lawyer in Berlin. "It will be an exciting and also heavily political issue who will have the say in the end. My tip is it’s going to be the Germans."

EON said Sunday that it agreed to acquire Innogy from German rival RWE AG, consolidating the country’s energy industry as utilities grapple with the accelerating shift to renewables. In a complex deal involving shares and asset swaps, EON will emerge with the retail and network businesses of both companies, while RWE will end up owning the combined renewable-generation businesses as well as a stake in EON.

EON is targeting about 700 million euros in cost savings from the acquisition, according to people familiar with the matter.

Apple, Google

Vestager, 49, and Mundt are Europe’s most active and high-profile competition officials. Vestager has become a scourge of the U.S. tech industry, levying record fines against Google and tackling tax deals at Apple Inc. and Amazon.com Inc.

But at the same time, the 57-year-old Mundt has become the toughest national regulator in the EU. After tackling beer and sausage cartels, he’s made a target of Facebook Inc. in a potentially groundbreaking case over how the social network scoops up information on users to drive advertising revenue.

Vestager declined to comment on the deal at a conference in Brussels. A spokesman for Mundt also declined to comment.

Under EU rules, Vestager can decide whether to keep the the deal or send it to a national authority. But these decisions are also politically influenced and the German government is likely to also use its clout one way or the other, said Gussone.

Three Blocked Mergers

While Vestager has been nearly as tough on deals as on tech -- she’s blocked three mergers and two others fell apart under EU scrutiny. But national regulators are generally seen as tougher on some deals because they look at more local issues than the EU.

The companies probably hope the project will be reviewed in Brussels because the Federal Cartel Office in recent years has taken a strict stand on the energy market, according to Knut Lange, a law professor at the University of Bayreuth. But even the German regulators themselves might have some motives to relinquish it to their EU counterparts.

"German antitrust regulation has become highly politicized in recent years, and this case will also be a big political issue," Lange said. "So, it could also turn out that you’d want to get rid of that hot potato and clandestinely be happy to toss it to people in Brussels."

Germany’s smaller power companies are wishing for a thorough review as they fear the new competitor might hurt competition.

Market Clout

“A mega-company is being created here with matching market clout,” said Wilfried Gillrath, managing director of Lichtblick SE, Germany’s biggest provider of green power to the retail market with 1 million customers. “That’s a danger to competition in the power market and can lead to higher prices for consumers. This merger must be scrutinized.”

Analysts are already predicting a rough ride from whichever agencies end up reviewing the deal, with retail-asset sales expected to be required to allay potential antitrust concerns.

“We tend to expect EON to aim to get rid of retail (and keeping only networks) in later staged transactions,” analysts at Kepler Cheuvreux said in a note to clients on Monday.

There’s no need to get additional formal approval from Germany’s network regulator BNetzA, according to Ivana Mikesic, a Frankfurt-based regulatory lawyer. However, as EON will have both network and sales businesses, it has to structure the ventures in a way to comply with EU rules generally aiming to separate suppliers form network operators, she said.

“Given that the companies have made their plan public, it’s highly likely they’ve already liaised with the BNetA to make sure there’s no issue,” said Mikesic. “While the network regulator can’t formally veto it, energy companies will attempt to reach at least an informal accord with the authority. In the end, it is always good to stay on good terms with the authority they have to work with on so many things and practically on a daily basis."

Once a merger has been formally notified with the European Commission, the EU’s antitrust arm has 25 working days to decide whether it wants to open an in-depth review, which adds another 90 working days to the deadline for approving or vetoing the deal.

There can be a handful of extensions to consider remedies and other procedural hold-ups. Companies often delay the process by putting off the formal notification as long as possible.

In Germany, the Federal Cartel Office must notify parties one months after the filing whether it wants to open an in-depth probe for which it could take another three months.

— With assistance by Aoife White, and William Canny

(Updates with cost savings in fifth paragraph.)
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