At the end of 2014, Johannes Teyssen, the chief executive of E.ON, surprised investors with a radical plan to break up Germany's largest power producer into two businesses: E.ON, which will turn to renewable energy, sales and marketing and networks, and a new company, Uniper, which will operate the old coal and natural gas power plants and trade commodities.
The new E.ON will also take care of the German nuclear power plants until they are all mothballed by 2022 and be responsible for dismantling them afterwards.
Next week, after nearly a year and a half of preparation, E.ON shareholders are set to formally approve the breakup, which in itself is not a guarantee for success but one utility's attempt to retool for the future amid Germany's push into renewables and shutdown of nuclear energy.
In an exclusive interview with Handelsblatt, Mr. Teyssen dampened hopes that the corporate breakup itself would generate a quick payoff for E.ON, whose balance sheet has been decimated by the effects of the renewables mandate, which has brought a glut of electricity onto the German market.
"Of course, the starting position has changed,'' Mr. Teyssen said in the interview. "We are already missing a couple of hundreds of millions of euros in income, sums both units had counted on.''
Renewable energies are a great opportunity, and that is something I used to judge much more skeptically. So perhaps I have become a little wiser, and that’s a good thing. Johannes Teyssen, Chief executive, E.ON
E.ON booked a record €7 billion ($8 billion) loss in 2015 amid Germany's renewables push. Even so, Mr. Teyssen talked up the potential for E.ON's old-generation power business, Uniper. "We have guaranteed its viability not only financially but from a business standpoint. There's no doubt about it,'' he said, referring to Uniper.
But the breakup isn't going as planned. Initially, the new renewables E.ON SE wanted to focus on growth and boosting sales. But first, it will be cutting costs through perhaps 2018, he said. But then, if all goes according to plan, renewables sales should begin to climb.
The following interview marked the first time Mr. Teyssen had welcomed Handelsblatt journalists into his new office in Essen, now the seat of the new renewables-focused E.ON. Germany’s largest power company moved to the northwestern city at the beginning of this year.
The boss of Uniper, Klaus Schäfer, is staying behind in E.ON's old headquarters in Düsseldorf, where he and his company will focus on the conventional, fossil fuel-based world of the energy sector.
Mr. Teyssen’s new corner office has two glass facades and looks brighter and more friendly than the old one in Düsseldorf. The move is intended to create an optimistic mood – something the company urgently needs.
Handelsblatt: Mr. Teyssen, while energy companies have been stuck in a crisis mode for years, other branches of industry are awash in cash. Bayer wants to take over Monsanto for more than $60 billion. Don’t deals like that make you envious?
Johannes Teyssen: No. I’ve had my fair share of big phases of growth. It isn’t as if I don’t remember what it feels like.
But those feelings are a thing of the past. Now it’s your restructuring and liquidating skills that are more in demand than your ability to make good acquisitions.
There can be no question of liquidation. Spinning off Uniper is E.ON’s way of preparing for a new growth phase. There may not be any large leaps, but I am convinced that both companies, E.ON and Uniper, will grow again.
Doesn’t it make more sense in the current weakened state of the energy industry to bundle everything together with mergers? And yet, it’s not just E.ON going for spin-offs – your competitor RWE is doing the same thing.
Whether a consolidation makes sense always depends on the business. And for the areas in which E.ON will be involved in the future, I see no benefit. With renewable energy and customer-oriented energy services, size alone brings no decisive advantages, in my opinion. In the pharmaceutical industry, it’s a different ball game. There, basic research binds so much capital and resources – and when the product has been developed, it can immediately be marketed worldwide.
So we shouldn’t expect a new wave of mergers in the energy sector?
I see no sign of it, neither in Europe nor in America or Asia. It might be that all the players are currently re-gathering their strength. But it’s more probable that the rationale for it is very limited.
So there was no alternative to splitting E.ON into two companies?
There is always an alternative. We have a competitor just down the road who sees things differently.
You’re referring to RWE.
Its management still believes in the benefits of an integrated energy company.
Which keeps everything under one roof, i.e. both big power plants and renewable energy. Your competitor is also spinning off the energy-transition business to a new company. But RWE will retain the majority. In Handelsblatt articles, the heads of RWE claimed their strategy is better than E.ON's. How did you react to that?
That’s fine by me – it’s even a good thing. If we are right, and we think we are, I hope that nobody will be able to follow us quickly. Then we have an advantage.
So the E.ON strategy is better?
Better for E.ON in any case, but in the final analysis, only the future will tell. It’s not the competition we have to convince about our strategy, it’s our clients and investors. And if we turn out to be unsuccessful, it’s better that nobody follows us (laughs).
But the RWE strategy seems more convincing. RWE is placing shares in the new, green sector. E.ON, on the other hand, is creating a new division for its old, ailing nuclear power business. Surely the new RWE is clearly more attractive, right?
I’m sure you will understand that I see that differently. We are not even going to the stock exchange as a first step. Each investor will simply receive one additional Uniper share for every 10 E.ON shares. The stockholder’s assets remain the same; they are just divided up between two companies. Everyone can make his own decision about what to hang on to and what to sell. So our stockholders have another advantage: They have an additional option about what to do with their assets.
Since the end of 2014 when you announced E.ON was splitting up, conditions have deteriorated considerably. Electricity prices have plunged, just like the oil prices. Does the whole project still make sense?
It certainly does! In fact, this development even serves to confirm our decision. We are convinced that E.ON and Uniper will be able to react more quickly to the challenges in their respective markets and in a more focused way.
But falling prices are still putting E.ON under pressure.
Of course, the starting position has changed. We are already missing a couple of hundreds of millions of euros in income, sums both units had counted on. But the situation would still have changed for E.ON as an integrated concern. The strategic rationale was right and remains so.
But surely the starting position for Uniper is nothing short of catastrophic. With electricity prices less than €25 ($27.75) per megawatt hour, the power stations the company is taking over are hardly earning any money at all.
It is true that we had billions in depreciations last year, but Uniper is profitable in its operative business. Of course the company will have to economize initially. My colleague Klaus Schäfer will take a closer look at structures and costs. But we would have had to do that in the section anyway – even without the split. And in the new E.ON too, efficiency will remain a key issue.
So you are convinced that Uniper can survive, even in the current conditions?
And you can make Uniper independent with a good conscience?
Yes, we have assured ourselves in every way possible of its ability to survive – both in terms of the balance sheet and its commercial situation. We have no doubts at all, and neither do investors. The equity story, which Uniper colleagues have presented to the market, was well accepted. And Uniper was given a good rating, despite the difficult environment: BBB-, which is a stable investment-grade rating.
But the Uniper stock has no attractive story to offer.
I see that differently. It’s true that Uniper is heavily dependent on international price developments. But that also means that it has strong upward potential when prices increase again. In any case, the activities the company is pursuing are very good indeed compared with those of the competition. The power plants are efficient and emit relatively low levels of CO2. The hydroelectric power stations, gas storage facilities and international trading business are also very attractive.
And how are things at E.ON? How has the starting position changed?
Right after the split, we had wanted to change gears to growth. We have to postpone this and first gain strength. As planned, we will be investing twice as much as we write off. But at the same time, we will quickly sell shares in wind farms. So that means that initially our net investments will be roughly at the same level as our depreciations.
How long will this phase last?
That depends how good we are. But right now we are assuming that the consolidation phase will take until 2018.
And where are the opportunities for growth?
Ask anyone you like in the energy business about the biggest areas of growth, and he will name two sectors: customer-centric networks and renewable energy forms. E.ON is involved in both areas. Regional electricity networks can become the Internet of the energy transition – they will be digitized and intelligent. And renewable energy forms are growing worldwide. And our third area, distribution, is growing too. We are developing all kinds of new products having to do with energy efficiency.
How will E.ON come to terms with this new world? There’s no way you can keep up with competitors like Google.
Nor do we have to. There are areas we will not be able to occupy ourselves, for example, providing the equipment for an intelligent house. That’s where technology giants like Google, Siemens or Schneider Electric are active. We will invent the odd product or two, but we won't become a technology concern. We don’t have to invent new sensors or solar modules. Our strengths are know-how about the efficient use of energy and adaptability. It is our business to link new technologies so they are accessible to energy customers via networks. E.ON will use new technologies and develop business models based on them. But we also bring in external know-how. We have already invested in numerous startups – in Europe, Asia and America.
Your own career has been in the old world, as a manager of big nuclear and coal-fired power stations. Aren’t you the wrong man for this change?
No. I really have experienced just about everything – the times when energy supply was a monopoly, globalization, almost unlimited growth. The industry experienced upheaval and change again and again. And now it’s all about making the new energy world successful and affordable for our customers. That is, also for me personally, one of the most exciting adventures in the business world today. Right now, new products and services are being developed constantly all over the world.
How is E.ON going to manage the transition from coal producer to service provider?
Of course, companies that always worked in the service sector were traditionally faster. But we are no beginners. For a long time now, the customer has been the focus of what we do, and surveys in all our markets give us better scores than our competitors.
But E.ON still needs a new culture.
Yes, and that’s why it was a good idea to move to Essen. Formerly, in Düsseldorf, the entire administration was lumped together. Jürgen Schrempp [the former chief executive of Daimler-Benz] would have called it the “bullshit tower.” Here, in the new headquarters, we work with many operational departments. The entire team here, which looks after renewable energy forms, is responsible for German sales, the Department of Energy Efficiency. For me, that’s exciting.
In what way?
I have gotten out of the habit of arranging to meet people for lunch. I go to the company cafeteria alone and sit down at any table to join people I don’t know. Sometimes the people don’t really know who I am. Others know exactly who I am, and the discussion tends to dry up initially. But then interesting discussions invariably ensue. Once a month, we invite our managers for a drink with the theme “The Board Serves.” My colleagues on the board and I serve the beer. We have a few beers, get something to eat and talk a lot.
Are you still “Dr. Teyssen” or just Johannes?
As it is mostly English being spoken, I am Johannes. But in general, we don’t start calling each other “Du” [the familiar form of “You” used between friends and family, as opposed to “Sie”]. That tends to confuse Germans! We don’t all have to be bosom buddies. But in any case, the dynamics and the tempo of the company are changing.
How has Dr. Teyssen himself changed?
Anyone who knows me also knows I was never a manager with elitist pretensions. In Düsseldorf, I always rode my bicycle to work – not wearing a suit, because that would have looked strange.
And the coal-fired power plants that you passionately defended until recently are now suddenly bad? Will E.ON boss Teyssen now be seen on the political stage as a showpiece green manager?
I am still convinced that we also need conventional power plants. And I won’t park this opinion in the cloakroom. But in future I don’t feel I have to provide answers to all the questions. I will leave that to the colleagues who are involved in that part of the business. But it’s true that today I am greener and more aware of the environment than I used to be. Renewable energies are a great opportunity, and that is something I used to judge much more skeptically. So perhaps I have become a little wiser, and that’s a good thing.
Despite original plans to the contrary, E.ON now has to hang on to its nuclear power plants. There is now a proposal on the table to transfer responsibility for interim and final storage of waste to a fund. How do you feel about this?
The proposal, which the nuclear commission has made, is basically a good one in my opinion. It makes a lot of sense, is creative, and has been thought through. The question that might lead to disputes concerns the sums of money that companies should pay into the fund. In this respect, the commission accepts that the provisions we have calculated are correct. But it is calling for a surcharge, a kind of insurance in case costs do rise.
E.ON had at first, along with RWE, EnBW and Vattenfall, said it was too expensive. Now you are ready to compromise. Why?
We had asked our investors what they wanted. I was on a “roadshow,” anyway. The response was clear. It may be expensive but no solution would be much worse. I told the investors that E.ON could hardly do it alone but capital measures would probably be necessary. But investors would also be the ones to benefit the most. It would be a relief for the future of the stock if E.ON were to get rid of the liability.
So E.ON won’t be the cause of there failing to be an agreement?
There still are unanswered questions, but we are ready to talk and we acknowledge that the commission’s proposal is the impact point. The resolution was passed unanimously, and all the parties, all economic camps and factions, were represented in the nuclear committee. You can’t take a fundamentally opposing stance to that – at least E.ON can’t.
Next week you will put the break-up of E.ON to a vote in the general meeting of shareholders. You need 75 percent approval. Do you doubt you can reach that mark?
It’s like soccer. You’re a lot smarter after the final whistle. But I’m very confident.
What makes you so optimistic?
We were on the roadshow and spoke with a lot of major investors and with potential new investors. Our concept was well received, and I didn’t meet anybody who wants to vote against it. And the so-called proxy advisors also recommended that shareholders vote in favor of it. These are the advisors who work out recommendations for how large funds should vote. As far as I am able to humanly judge, I anticipate a very broad approval.
Spin-offs tend to attract professional plaintiffs. Are you prepared for lawsuits?
They most of all like to show up when valuation issues are involved. We don’t have that problem since we chose a spin-off that retains the share ratio. Each shareholder is getting the same share in each part.
Nevertheless, you wouldn’t be able to have the spin-off registered in the Commercial Register in good time. How problematic would that be?
It’s a manageable risk. Then, as a rule, there is the appeal directly to the higher regional court. That normally takes three months. That wouldn’t really be a tragedy. It’s a different matter with obvious legal errors. But we were very exacting in how we did it.
Are you also putting a new remuneration scheme up to a vote . . .
. . . which the shareholders’ advisors also recommended voting in favor of.
What’s being changed?
We are aligning compensation systematically to the success of the new and sustainable business model and to the interests of the investors. The short-term annual bonus will be based on the same key index that decides on the dividends, namely the earnings per share. Until now, long-term compensation was dependent on internal key performance indicators, the ratio of value generation and capital costs. It’s now crucial how E.ON stocks perform in relation to competitors’ stocks. There will be a bonus only when we create more value in dividends and share prices than the competition.
At the moment, VW’s leadership is the target of criticism for being paid €63 million in bonuses despite the diesel-emissions crisis. Was that a mistake?
I won’t comment on that.
Do you have an understanding for people who don’t comprehend such bonuses?
The people have the impression that the gap between the wages of executive boards and normal wage earners have fundamentally widened. If you look at it over several decades, that impression isn’t wrong. That can threaten the cohesion of society in the long run.
Where does E.ON draw the line on pay?
It was always important to us that there would be no wages in the double-digit millions possible in any of the companies in our group. There just happens to be a point at which people have a problem understanding that such wages can be appropriate for a person’s performance. I do believe that the complexity and the risk in the work executive boards do has increased dramatically. A certain increase is therefore justified. The pay must stay in scale in the absolute level and in relation to the workforce.
Can you name a specific amount?
For me, the upper limit is 50 times the average wage.
And that’s the case at E.ON?
The difference between low and high has even become less at E.ON. Not dramatically. But it has been reduced.
The British will soon be voting on whether to leave the European Union. What would that mean for E.ON?
The consequences for E.ON would most likely be manageable. Our business there is local. Of course, the development of the pound is a risk. On the other hand, we have debts in pounds. That has a balancing-out effect. But as a citizen, I am looking at the referendum with concern.
In what way?
The consequence of a “Brexit” would be a dramatic weakening of Great Britain as well as a dramatic weakening of Europe. For me, the common sense, the Anglo-Saxon way of organizing economic activity, is a role model in Europe. It’s worthwhile to fight to keep the British in Europe. I sincerely hope that the better arguments will prevail. But I also warn about simply returning to the order of the day if the Brexit is averted.
Behind this is a great skepticism about Europe. It’s also there in France and Germany, and we have to take it very seriously. Europe will have to reinvent itself. In either case. Either there will considerable damage or a wake-up call. In any case, we need to work on Europe.
Sven Afhüppe is Handelsblatt’s editor in chief. Jürgen Flauger covers the energy market, including electricity and gas providers, international market developments, and energy policy. To contact the authors: [email protected] and [email protected]