Utility Week

20 | 16TH - 22ND MARCH 2018 | UTILITY WEEK Finance & Investment Analysis R WE and Eon are, or were until fairly recently, very similar companies. Both have strong historical ties to German industry and both are based in Essen in Ger- many's old industrial heartland of the Ruhr Valley. Both have, or had, operations cover- ing every link in the electricity supply chain in Europe – from generation to networks to retail – including large fleets of nuclear and coal-fired power stations. Both have faced the massive challenge of repositioning their businesses in response to Germany's seismic shi away from nuclear and fossil fuel generation towards renewables – known across the world as the "Energiewende" – as well as similar moves elsewhere in Europe. Both reacted by split- ting themselves apart, creating two new companies in the process. But in making these splits a difference began to emerge. RWE separated its retail, networks and renewables operations into Innogy, leaving the parent company with the legacy nuclear and fossil fuel activities. Eon took the opposite approach, spinning off its fossil fuel portfolio into Uniper, while retain- ing the renewable, network and retail opera- tions (although, like RWE, it kept its nuclear fleet). The huge asset-swapping deal between RWE and Eon announced last Sunday could now see their paths diverge almost completely. RWE has agreed to exchange its 76.8 per cent stake in Innogy for a 16.67 per cent stake in Eon, as well as Eon's renewable portfolio and €1.5 billion in cash. Innogy's renewable division will be returned to RWE. In accordance with Germany's stock mar- ket regulations, Eon has also offered to buy out the other Innogy shareholders at a total value of €40 per share – consisting of an offer price of €36.76 plus projected dividends of €3.24 across 2017 and 2018. Combined with the sale of its 46.65 per cent stake in Uniper to Fortum, the deal The Eon and RWE mega-deal In what amounts to a massive asset swap, RWE and Eon are betting their futures on opposite ends of the energy value chain. Tom Grimwood looks at who gets what, and what will be left. will leave Eon with no fossil fuel or renew- able generation assets, allowing it to instead focus on retail and networks. On the flip- side, RWE will essentially become a gen- eration company, with only a small stake in the retail and network sectors through its interest in Eon. David Hatcher, partner for energy and resources at consultancy Baringa, sees two potential motivations for the deal. First, there is a greater benefit in specialising in particu- lar parts of the value chain as opposed to historic vertical integration – from genera- tion down to retail – and second, that "the future greater value stream lies at one end or the other, and that's where they're trying to gravitate their focus and attention". Hatcher tells Utility Week "…it's not 100 per cent clear where the optimum value is going to lie in the generation through to retail value chain in the future market. "The fact that Eon is moving down- stream into the regulated networks and customer solutions space, and RWE is mov- ing upstream, shows that two organisations are both placing bets at different ends of the market," he adds. "Very interestingly, RWE does get that slight hedge of the 16 per cent in Eon." According a joint press release from the two companies on Monday evening, it is the former rather than the latter. "Both com- panies are convinced that their positions in their respective core businesses can be fur- ther strengthened," the statement reads. "This strategic exchange of businesses will create two highly focused companies that will shape a better future for Europe's energy landscape," said Eon chief executive Johannes Teyssen. In the UK, the deal will have a substan- tial impact on the renewables sector, where Eon and Innogy are by themselves relatively small players in the market. Eon has around 650MW of offshore wind capacity operating in the UK plus 250MW of onshore wind. It also owns a 50.1 per cent share in the 400MW Rampion offshore windfarm, which is due to be commissioned later this year. Innogy currently has around 630MW of €40 €30 €20 €10 €0 2014 2015 2016 2017 2018 RWE SHARE PRICE, FIVE YEAR EON SHARE PRICE, FIVE YEAR €16 €14 €12 €10 €8 €6 2014 2015 2016 2017 2018

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