FRANKFURT: RWE AG, in a move resembling that of rival utility E.ON SE, plans to spin off its renewable energy business in response to Germany’s move away from nuclear power and a changing energy landscape.
After shunning the idea for a year, RWE surprised markets by saying it would bundle its renewable energy, power-grid and retail businesses into a new company, and float at least 10% of it in an initial public offering at the end of 2016. The German company will retain its conventional power-generation activities, including nuclear operations.
“Now we are taking the next logical step in our transformation process,” Chief Executive Peter Terium said.
As recently as last month, RWE officials had said it was too early to determine a change in strategy, although they didn’t rule out a split. The possibility had been looming since E.ON, a year ago, said it would split in two, grouping its conventional power, trading, exploration and production operations into a new company, Uniper.
Both German companies are building business models that will help them survive the bleak outlook for traditional power generation. The government’s support for renewable power sources has created an energy glut, depressing prices.
Following the 2011 Fukushima nuclear disaster in Japan, German Chancellor Angela Merkel said the country would phase out nuclear power by 2022. The decision caught nuclear operators like RWE and E.ON off-guard, reversing a 2010 plan to allow some nuclear plants to operate considerably longer.
The poor business environment has weighed heavily on both companies’ stock. RWE shares have dropped around 60% since the start of the year, even considering their 16% rise on Tuesday. E.ON has lost 40% this year, while the DAX gained 6%.
RWE’s plan to keep conventional power while spinning off a stake in renewable energy is the inverse of E.ON’s strategy of spinning off old technology to let the parent focus on renewables.
In September, E.ON backtracked on its original plan to shift German nuclear operations to Uniper due to concerns about liability. The German nuclear operations will now remain in E.ON’s parent company. The German government has said it is considering making nuclear operators indefinitely liable for nuclear costs to ensure taxpayers won’t be left with the bill. That made unloading nuclear operations on Uniper too risky.
RWE said Tuesday that it stood by its responsibilities regarding nuclear power, and that position wouldn’t be undermined by the new structure.
RWE’s plan is subject to approval by the supervisory board, which is expected to discuss the matter at a meeting on Dec. 11.
Union Investment fund manager Thomas Deser called the plan a smart move. “Mr. Terium is sending a positive signal to capital markets, politicians and credit-rating firms: an improved liquidity situation, securing the credit rating, and access to fresh funds for growth investments,” he said.
Mr. Deser said RWE’s decision restored it as “a credible partner” in the energy debate.
The new company, to begin operation next year, will employ roughly 40,000 of RWE’s 60,000 employees and achieve annual revenue of more than €40 billion, or $42.3 billion, RWE said. Earnings before interest, tax, depreciation and amortization are expected to be roughly €4 billion. RWE said it would keep a stake of at least 51% in the subsidiary long-term.
Investors welcomed the news, in hopes that RWE was finally catching up with E.ON, which announced its revamp nearly a year ago to the day, on Nov. 30, 2014.
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