A year after the break-up of Eon and RWE in a sweeping restructuring of Germany’s power industry, investors are bracing for the next wave of upheaval in European utilities. Bankers and industry executives say further deals look certain as electricity companies scramble to adapt to the accelerating shift towards renewable energy. The £318m sale last week of two UK gas-fired power stations by Centrica to EPH of the Czech Republic was the latest example of a utility reshaping its portfolio. Now, expectations are growing of bigger transactions to come. Much of the anticipation is focused on the new companies created by the separation of Eon and RWE. Both German utilities split themselves in two, with one unit focused on traditional thermal generating businesses — dominated by coal and gas-fired power — and the other comprising “cleaner” businesses, such as renewables, electricity distribution and consumer services. Uniper, the conventional power business spun out of Eon, has been touted by analysts and bankers as a potential target for Fortum, the Finnish utility.
Meanwhile, Innogy, the clean energy business split from RWE, has been linked with Engie of France. Isabelle Kocher, Engie’s chief executive, has denied interest in such a deal and her counterpart at Innogy, Peter Terium, last week said there had been no contact between the companies. Uniper and Fortum declined to comment. However, anticipation of mergers and acquisitions has been one of the factors behind a 10 per cent increase in the valuation of European utilities this year, outperforming the broader market by a third. Johannes Teyssen, chief executive of Eon, says the case for consolidation is most obvious among traditional thermal generators as they seek strength through scale in the face of rising competition from wind and solar. “In the conventional energy world, scale matters a lot so I’m sure that we will see more consolidation steps,” he told a recent FT energy conference. “As more and more [fossil fuel] assets are retired, the smaller players will become smaller and less competitive and less able to deliver value.” Europe’s 12 biggest utilities have written off more than €100bn of assets since 2010, according to Jefferies, as scores of coal and gas-fired plants have been closed or mothballed. Those that remain have fallen in value.
Julian Critchlow, partner at Bain & Company, the consultancy, says growth in renewables has created excess capacity of about 25-30 per cent in the European power sector, depressing profit margins for generators. He predicts mergers of equals through which companies will share synergies from closing uneconomic plants. Some companies still see value in buying traditional power stations. EPH’s deal with Centrica last week was the latest in a series of similar acquisitions by the Czech group from larger European utilities, including German assets of Sweden’s Vattenfall and Eon in Italy. Although renewables are gaining share, conventional thermal generation remained the biggest source of EU electricity last year at 49 per cent of output. Good profits can still be made from coal and gas plants, especially during periods when wind and solar output is low. While EPH scavenges for unwanted assets, Fortum is seen as a potential driver of larger scale consolidation. The Finnish group has plenty of cash after the €9bn sale of its Nordic electricity distribution assets two years ago and Pekka Lundmark, chief executive, has made no secret of his appetite for deals. Uniper is seen as a prime target because, although hard coal and lignite are its biggest fuel source, the group also has scale in cleaner gas, nuclear and hydro generation. Analysts at Macquarie wrote last week that they saw “a very high likelihood” of Fortum buying the 47 per cent stake in Uniper held by Eon, and this “could be the first step to a full takeover”.
Others have highlighted potential synergies between Uniper and its domestic rival RWE. “The big problem with RWE is they are overweight in coal and lignite in particular,” says Mark Lewis, head of European utilities research at Barclays. “That means Uniper’s asset base, which is more tilted towards gas, becomes a very attractive way of hedging your lignite exposure.” In a scenario floated by several analysts and bankers, Fortum might end up with Uniper’s hydro and nuclear assets in Scandinavia while its German, Benelux and UK coal and gas assets could go to buyers such as RWE or EPH. “Fortum could decide to buy Uniper as a whole and then reach agreement to sell on some of these assets at decent exit multiples to other players,” says Macquarie. An outcome of this kind would represent a further carve-up of German utilities after the “big bang” restructuring of 2016 that left several loose ends. Eon has made clear it wants to sell its Uniper stake but cannot do so before 2018 without triggering a big tax bill. RWE is also thought likely to sell down its 77 per cent stake in Innogy to strengthen its battered balance sheet — and potentially fund acquisitions.
Into these permutations have been added reports of a tentative French-led proposal for RWE to swap a majority stake in Innogy for a minority stake in Engie. That deal could have political appeal for Emmanuel Macron, France’s new president, as a way of deepening Franco-German energy ties and increasing his country’s exposure to renewables. Engie is 29 per cent owned by the French government. Analysts and bankers say the industrial logic of such a deal is unclear. “Most of the value of Innogy is in their grid business so it would seem to be a very indirect way of acquiring exposure to renewables and getting a lot of other stuff you don’t need,” says Mr Lewis at Barclays. Whatever constellation of deals emerges, it looks increasingly likely that the ripples from restructuring of RWE and Eon will not stop at Germany’s borders. As Mr Critchlow says: “Once one player consolidates, like at a dance, everybody will look for a preferred dance partner.” .Yet that was the aim when the UK arm of Engie paid £330m to acquire a business specialising in making buildings more energy efficient from Keepmoat, the construction company.
The deal highlighted the increasing investment by power companies in services aimed at helping customers manage energy use in ways that can reduce their costs and carbon footprints. Other examples include Centrica’s “smart home” service called Hive, which allows people to control heating and lighting via their smartphone. “There’s more value today in helping reduce consumption than in selling energy itself,” says Wilfrid Petrie, head of Engie in the UK. He likens the shift to the one undergone by the telecoms industry, which today finds its growth in services and content rather than the line rental and phone calls that used to be its core business. At the same time as investing in energy efficiency and renewables, Engie is shedding fossil fuel assets as part of a €15bn disposal programme. Similar reallocations of capital are under way at power companies across Europe in response to what Mr Petrie describes as a “revolution” in the sector. “Energy transitions are nothing new,” says Mr Petrie. “We went from wood to coal over a few centuries, and to oil and gas and electricity over a few decades. What is different this time is the speed of change.”
Source: Financial Times