An all-German deal to split Innogy between RWE and E.ON looks set to create a template for European utilities M&A that includes the demise of the integrated model, no more big cross-border deals and a quest for emerging market growth.
Under the deal, announced on Sunday, German utility RWE will combine the renewables businesses of rival E.ON with Innogy’s, while E.ON will acquire Innogy’s regulated energy networks and customer operations.
The deal continues the break-up of E.ON and RWE, which were two vertically integrated utilities before they split their renewables and grids from their thermal generation assets.
With E.ON set to sell its stake in thermal generation unit Uniper to Finland’s Fortum this year, E.ON and RWE will be left with the only assets that still make money in Europe’s power industry: subsidised renewables and regulated networks.
Germany’s switch from nuclear to renewables after the Fukushima disaster in 2011 and European Union support for renewable energy created huge overcapacity that is pricing thermal and nuclear-power generation out of the market.
In response, RWE’s and E.ON’s first spin-offs two years ago were about getting out of traditional generation.
Now, even highly integrated state-owned utilities like France’s EDF and Czech Republic’s CEZ have been presented with break-up scenarios.
“European utilities are increasingly specialising in one part of the value chain,” said Colette Lewiner, energy adviser to the chairman of Capgemini, a consultancy.
She said this might be partly because spot markets set the power price and thus integrate the value chain from power generation to electricity retailing.
The Innogy deal is also notable for its lack of foreign utilities’ involvement.
Before the 2008 financial crisis, European utilities were in a dealmaking frenzy, all seeking to buy footholds in other European countries.
But most of those deals fell through or turned sour and now only a few EU utilities have a significant presence in other EU countries.
Investment bankers had floated Enel, Iberdrola or Engie as potential buyers of Innogy. But none of them materialised as bidders.
Electricity, unlike oil and gas, is difficult to transport, which is why utilities never went global. And besides the physics, politics too has played a part in crimping cross-border deals.
A decade ago, the EU tried to drive politics out of utilities with a push for privatisation and the unbundling of monopoly-owned grids. But politics has returned via the back door.
Germany’s nuclear exit, Spain’s unwinding of renewables subsidies and Britain’s threat of price caps all show the extent to which utilities dance to governments’ regulatory tunes.
Bid to innovate
Roland Vetter, chief investment officer at PraXis Partners, said that besides valuation and the lack of synergies, politics was a major reason for foreign utilities not buying Innogy.
“The moment you own these businesses, you are involved in German politics. E.ON already is, for them it is not an issue,” he said.
German companies have some impact on politicians, but not foreigners, he said. “If, say, Iberdrola buys a German company, there is no protection, only downside.”
Vetter expects no further major M&A deals, neither intra-country or on a regional scale.
That is not to say there will be no smaller deals.
In a bid to innovate, utilities are buying dozens of small to medium-size companies in new business areas such as electric vehicle charging, insulation, smart meters and energy services.
Utilities will also continue investing in emerging markets, which have huge power needs and more liberal regulation.
“As new market entrants steal their customers at home, European utilities have no choice but to go seek growth where they can find it,” said Montpellier University’s Jacques Percebois.