FRANKFURT/DUESSELDORF – German utility E.ON (EONGn.DE) is emerging as an investor favorite following a major asset swap deal with rival RWE (RWEG.DE) this week, with its eye-popping share of regulated profits outshining RWE’s riskier bet on renewables.
Following the deal, announced on Sunday, shares in both companies soared, as did those in RWE’s networks and renewables business Innogy (IGY.DE), which will be broken up as part of the deal and whose assets will split among E.ON and RWE.
Investors have had almost a week to digest a barrage of additional details and presentations on the multifaceted transaction, with some concluding that E.ON got the better end of the deal because most of its profits are now guaranteed.
“E.ON is the winner,” said Thomas Hechtfischer, managing director of shareholder advisory group DSW, which usually represents roughly 1 percent of voting rights at the annual general meetings of E.ON and RWE.
“I don’t see a real advantage for RWE in the new set-up.”
Under the deal, E.ON will swallow Innogy’s networks as well as its retail energy operations, becoming the European leader in both areas and raising its share of regulated profits to 80 percent, comparable in size only to Britain’s National Grid (NG.L).
For its part, RWE will become Europe’s second-largest wind power player after Denmark’s Orsted (ORSTED.CO) by taking on Innogy’s and E.ON’s renewable businesses, exposing it to a fast-growing but highly competitive renewables market.
“If you want low risk with structural upside you’re well advised to buy E.ON,” said Andreas Schneller, head of EIC Funds at wealth manager Pury Pictet Turrettini & Cie, who oversees a 70 million Swiss Francs ($74 million) utility fund 2629827.S.
“We think RWE is massively undervalued and therefore very attractive. However, it is the riskier bet,” he added. RWE’s skeptical municipal shareholders have supported the deal.
Investment returns on gas and power grids are set by national regulators, allowing a reliable forecast of which way future profits will go. On the downside, growth can only be achieved through efficiency measures.
Thomas Deser, fund manager at Union Investment, said E.ON’s future customer solutions retail energy business, Europe’s largest with about 50 million clients, also offered upside, and was less optimistic about competition in the clean energy space.
A shift towards auctions and away from unlimited subsidies has squeezed Europe’s renewables sector and forced players along the supply chain to cut costs and make low-ball offers to secure a piece of the dwindling state support schemes.
“Following the changes in the market regimes, current renewable projects have become less attractive in a lot of places, also due to competition from Big Oil, which means it is not a great long-term growth option in terms of margins,” Deser said.
The lack of major synergies on the RWE side, seen at just 50 million euros so far, has also raised questions in light of the 600-800 million euros seen at E.ON, according to Martijn Olthof, senior portfolio manager at APG Asset Management, one of Innogy’s minority shareholders.
He also said that investors keen on renewable exposure, which also include Norway’s $1 trillion sovereign wealth fund, could like him have a problem with adding RWE to their portfolio due to its fleet of coal-fired power plants.
“That carbon footprint makes it pretty difficult for us to invest.”
($1 = 0.9498 Swiss francs)
($1 = 0.8111 euros)