Utility Week

UTILITY WEEK | 16TH - 22ND MARCH 2018 | 21 Finance & Investment Comment The devil's in the detail "It would be premature to rule out other bidders seeking to break up the cosy German power party" operational offshore wind and 340MW of onshore wind. It additionally owns a 25 per cent share in the Galloper offshore wind- farm, which is nearing completion, and won a contract for difference in September for its 860MW Triton Knoll project with a strike price of £74.75/MWh. The combining of these two portfolios would make RWE one of the largest players in the market, rivalling Orsted, SSE and Scottish Power. But the most significant implications are for the retail sector, where Eon's acquisition of Innogy is likely to raise concerns over its market power. Innogy owns the supplier Npower, which was revealed in November to be merging with SSE's retail arm, turning the big six into the big five. Based on the most recent figures from Ofgem, the merger would create the UK's largest electricity supplier and the second- largest gas supplier behind British Gas, with market shares of 24 per cent and 19 per cent respectively. The marriage, as proposed, would see Innogy take a 34.4 per cent stake in the busi- ness, with SSE demerging its 65.6 per cent stake to its shareholders upon completion. Eon has said it plans to integrate Innogy into the parent company, ending its short- lived existence. This could eventually leave Eon with stakes in two of the new big five suppliers, which together would have elec- tricity and gas market shares of 37 per cent and 31 per cent. The Competition and Markets Authority (CMA) has already opened an investiga- tion into the SSE-Npower merger. Analysts at investment firm Jefferies say Eon's future ownership of Npower "could make obtain- ing the necessary regulatory clearance more complex". Nevertheless, SSE and Npower have both insisted that the merger remains on track. "The deal was already under scrutiny from the CMA so I'm not sure it really changes the level of scrutiny," says Hatcher. "It probably just means some additional remedies may be imposed, being that now you'll potentially have three of the big six involved together." Speaking to Reuters, associate at consul- tancy Cornwall Insight, Peter Atherton, said if the CMA is unhappy with the merger as it stands, one workaround could be for Eon to sell down its share in the new company. "We haven't seen any indication Eon wants to do that, but if [the SSE-Npower merger] is a stumbling block for the wider deal then that is a logical solution," he told the news agency. For now, we can only wait and see how it all plays out. G ermany's top two energy play- ers, Eon and RWE, have been dreadful share price perform- ers since the onset of the financial crisis in 2008. In the intervening decade, a combination of low gen- eration prices, the closedown of all nuclear power plants in Germany by 2022 and high net debt have pro- vided immense challenges. Aer recent restructuring by both companies, a new deal has now been announced, whereby Eon is buying Innogy, in which RWE cur- rently has a 76.8 per cent stake: this deal values Innogy at c€22 billion. In return, RWE receives a 16.7 per cent equity stake in Eon's expanded business. Whether in time this key stake is a prelude to a full "national champion" merger remains to be seen. Assuming the deal proceeds without major changes, Eon will become highly dependent on energy retail and networks, the latter a key cash earner. Significantly, Eon recently sold its 47 per cent stake in Uniper, primarily a generation business, to Finland's Fortum. For RWE, apart from the notable boost to its finances and its dividend payment capability, there will be an element of returning to its genera- tion roots in the Ruhr. RWE remains Germany's lead- ing generator, with a portfolio of fossil-fuelled plants, which will be supplemented by Innogy's renew- able generation business. By 2022, all nuclear plants in Germany are scheduled for closure following the highly controversial decision by chancellor Angela Merkel to abandon nuclear power generation aer the Fukushima disaster. The proposed deal throws up a ra of issues. First, how will the various regula- tory processes be navigated? The German establishment will, no doubt, be keen for the deal to proceed – a big plus. But there will be questions surrounding competi- tion and likely job losses. Second, Eon's initiative raises various questions about the SSE/ Innogy deal that was announced in 2017 – and has still to be completed. To date, SSE has said little. In any event, the UK retail energy businesses of both Eon and RWE/ Innogy overlap, as they do in Ger- many. Hence, substantial job cuts look likely, with up to 5,000 already announced. Furthermore, there is bound to be a reassessment of the various over- seas assets, including generating assets, that Eon and RWE – either directly or through its 76.8 per cent Innogy stake – currently own. Lastly, it would be premature to rule out other bidders seeking to break up the cosy German power party. Unlikely but not impossible. Despite these uncertainties – and many others – the markets have so far responded positively to the deal. Not surprisingly, Innogy's share price soared on the back of the deal – it is up 13 per cent on the day so far: Eon's has risen by a more modest 4 per cent. It is very early days in what may be a long corporate saga, as vari- ous interested parties get into the act. While many issues have already been squared, others have not. But, aer a desperately difficult decade, perhaps the announcement heralds light at the end of the tunnel for Eon and some much-needed good news for the beleaguered RWE.

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