A deal between E.ON and RWE to share RWE’s subsidiary Innogy is seeing some resistance in Germany.
E.ON has agreed to take over a 76.8 per cent stake of utility company RWE’s subsidiary Innogy in exchange for a far-reaching range of assets from E.ON’s renewables and gas storage business.
In exchange RWE was to be granted an effective participation of 16.67 percent in E.ON, and would pay the company EUR1.5bn.
However the deal may be coming under threat from various actors.
Handelsblatt has reported that one contract between a mid-sized city and Innogy contains a get-out clause allowing the city to ditch Innogy as a grid operator if it comes under new ownership.
Innogy is in effect getting a new owner under the asset-swap agreement with E.ON — and cities are scenting an opportunity to take back control of their power supply in a market that’s becoming increasingly fragmented with the surge in solar and wind energy. There are scores of such exclusive supply contracts with “change of control” clauses and many local authorities are pondering whether to invoke them, Handelsblatt learned.
The business daily reports that the get-out clauses threaten to turn into a huge headache for E.ON boss Johannes Teyssen who wants to turn the group into one of Europe’s largest electricity providers and Germany’s biggest electricity operator and retailer. In fact, such clauses exist not only in network supply deals but also in many of the more than 100 stakes that Innogy owns in regional and municipal utilities, as well as in shares stakes it owns in eastern Europe.
Innogy has close to 4,000 such contracts to operate the networks that supply gas and electricity to municipalities in Germany. They usually run for 15 to 20 years, meaning they’re effectively a license to print money, because the network operator is always able to charge energy suppliers for the use of its cables. The guaranteed income makes them an important reason why energy giant E.ON has decided to take over much of Innogy. Network and infrastructure fees generated 63 percent of Innogy’s operating earnings last year.
Asked to comment, Innogy confirmed that change of control clauses existed in many supply deals and shareholdings — and that local authorities had expressed an interest in using the clause.
Local politicians are wary of the deal because they trust RWE more than E.ON, according to Handelsblatt. RWE has been fostering relationships with local authorities and municipal providers ever since it was founded 120 years ago, and over the years, cities have acquired shareholdings in RWE, and RWE has in turn invested in local utilities, thereby securing lucrative supply concessions for itself.
Innogy took over those contracts when it was split off from RWE two years ago to run RWE’s renewables business. E.ON, on the other hand, has done little to nurture relations with cities in the past, said one industry insider. “The motto was: either we get 100 percent or we’ll pull out.”
Last week, the first sign of a threat to the deal emerged when Innogy said Australian investor Macquarie was interested in taking over its business in the Czech Republic and had cited the change of control clause.
A rival bid for some of Innogy’s assets would give the group a stronger hand in negotiations with E.ON, the prospective future owner of its networks and retail units which has flagged as many as 5,000 job cuts as part of the deal.
Meanwhile Innogy’s new CEO has expressed his unease at the arrangement.
Uwe Tigges, appointed last week, stated that he is less than enthusiastic about his company’s looming break-up, saying, “The fact is: Innogy today is an economically-independent and strong energy company.”
Given that there was virtually no chance to avert the sale due to RWE’s controlling stake in Innogy, however, the CEO had no choice but to “focus on what we can influence” and “approach the challenges we face with confidence.”
A representative of Innogy shareholders expressed disappointment at the looming break-up of the German energy company at the AGM.
“The EON-RWE deal is the number one topic for all of us,” Thomas Hechtfischer, director of the German Society for the Protection of Securities Holders (DSW) told the press. “Innogy was well progressed on the path to independence. Now the company is being betrayed, sold, and robbed of its future.”
Although E.ON has already submitted its bid to the Federal Agency for Financial Services Supervision (Bafin), it has yet to be approved. Innogy’s management board has up to two weeks after the formal publication of the offer to issue a “justified response” assessing the merits of the acquisition.