E.ON and RWE agree Innogy deal creating new German energy giants

Innogy acquisition will refocus E.ON on networks and customer solutions and RWE on renewables generation.
Published: Thu 22 Mar 2018

The complex buyout or takeover deal between German energy giants E.ON and RWE and its subsidiary Innogy is set to streamline both companies, while maintaining their combined strengths in the market. RWE will become a renewables producer and E.ON a networks and customer solutions provider.

The proposal, which is based principally on asset exchange, is for E.ON to acquire RWE’s majority (76.8%) stake in Innogy. In turn, RWE will receive E.ON’s renewables activities, Innogy’s renewables business, a minority (16.67%) stake in the enlarged E.ON and certain other assets.

“This strategic exchange of businesses will create two highly focused companies that will shape a better future for Europe’s energy landscape,” says E.ON CEO Johannes Teyssen.

Utility mergers and acquisitions

With the traditional utility model under threat from the transforming energy sector, internal reorganisation and mergers and acquisitions are the key opportunities for building a future-proof business.

The situation is most critical in Germany, with the rapid growth of wind and solar power to enable the phase out of nuclear power by 2020 under the country’s Energiewende sector transformation plan.

Innogy was spun out of RWE in 2015, pooling the company’s renewables, grids and retail activities in Germany and internationally to form a decentralised renewables business with a strong focus on innovation.

While any connection is denied by Rolf Martin Schmitz, CEO of RWE AG, the sudden departure in December of founding CEO Peter Terium, formerly CEO of RWE AG, apparently related to his approach to the business, inevitably marks a transition point for the company. Since then Chief Human Resources Officer Uwe Tigges has held the position on a temporary basis.

At that time, the week before Christmas, a company statement said that the corporate and finance strategy being pursued was generally welcomed but there is “necessity for greater emphasis on cost discipline and a more focused growth and investment strategy.”

At the time of the Innogy spin out, E.ON was also undergoing a reorganisation, opting to spin out its power generation and commodities business into the new company Uniper – currently under acquisition by Finland utility Fortum. With this new deal, the remainder of its generation operations are shed in what appears a means of meeting the long-term ambitions of both companies – and in a novel way with the limited cash requirement.

“Bringing together E.ON’s and Innogy’s activities in the fields of networks and customer solutions will allow E.ON to enhance its strong offering along the part of the energy value chain that is closest to the customer. The new E.ON will be able to intensify its efforts towards climate protection, for example through the faster rollout of charging networks for e-mobility or the advancement of smart grids in Europe,” says Teyssen.

“Significant size is crucial for success in this future-orientated business,” notes Schmitz. “Our trading platform links and seamlessly brings to market all energy assets in our portfolio. The combination of these businesses, together with our solid financial situation, make RWE a strong partner of the energy transition – beyond the borders of Germany.”

New energy companies

Assuming the deal goes through with regulatory approval, what will the two new companies look like?

With the integration of E.ON’s and Innogy’s renewables businesses, RWE will gain a substantial renewable injection, approximately 8GW of offshore and onshore wind, hydro and photovoltaics, to its 40GW of primarily fossil fuel and nuclear generation. This would put RWE as number three in Europe in the renewable energy business as a whole, and number two behind Iberdrola in wind power. A further 1.5GW of offshore wind is in the pipeline.

For its part, E.ON will become one of the largest European energy companies with approximately 50m customers. However, no indication is given on whether Innogy would remain as an entity by name. Its largest asset is the grid business, which was the main driver of growth in 2017. The retail business is about half the size and renewables, which will be shed, a little over a sixth.

Competition will be one of the issues to be investigated and one potential obstacle may arise in the UK with Innogy’s npower and E.ON UK two of the ‘Big Six’ and regulator Ofgem anxious to increase rather than lower competition. npower is itself currently in a proposed merge with SSE, another of the Big Six, which is currently undergoing Competition and Markets Authority investigation.

With approvals to plan, the deal is expected to be completed by the end of 2019.