When German utility E.ON last month rolled out a reshuffle of the country’s energy market to EU regulators, its boss, Johannes Teyssen, acted as if it were practically a done deal.
In fact, the planned €20 billion ($22.8 billion) transaction with RWE, Germany’s largest electricity generator, is anything but in the bag. The EU Commission, the trading block’s antitrust authority, is set to decide by February 26 whether to wave it through, but first, it’s sounding out market participants for feedback – and that could spell trouble for Teyssen's aspirations, with ramifications outside Germany.
Under the complex asset swap proposed last March, E.ON would take over RWE’s 76.8 percent stake in Innogy and keep the unit’s networks and retail businesses. In return, RWE would receive E.ON’s and Innogy’s renewable activities.
In addition, RWE would get a 16.67 percent stake in E.ON, minority stakes held by E.ON in two nuclear plants, Innogy’s gas storage business and a stake Innogy holds in Austrian energy supplier Kelag. To offset a valuation difference, RWE would also pay E.ON €1.5 billion in cash.
Noting competitors’ qualms about the wider impact of the deal, the Commission has sent two questionnaires to market participants for critical feedback, Handelsblatt has learned.
One questionnaire is about E.ON's plans to acquire Innogy's power distribution and grid in a bid to become one of Europe’s largest power suppliers. The other concerns RWE's hoped-for absorption of Innogy’s and E.ON’s renewable energy activities – a move which would make RWE a major player across the energy spectrum, from wind and solar energy to gas and coal-fired power plants. RWE, clearly, also has plenty to lose in the event of a thumbs-down from Brussels.
What a difference a year can make. When the heads of E.ON and RWE unveiled the plans in 2018, the response from competition experts and consumer advocates was overwhelmingly positive. Even Andreas Mundt, the boss of Germany’s antitrust watchdog, the Federal Cartel Office, initially said the "competitive effects" in renewable energy, networks and sales were "manageable."
In the meantime, sources at the companies acknowledge that the risks of failure have increased, although E.ON officially insists the deal will be sealed this year. And critics of the deal have dug in.
"We take a critical view of the planned transaction by RWE and E.ON, as it can restrict competition in many areas," said Stefan Dohler, head of the Oldenburg regional utility EWE. He noted that E.ON would gain the right to concessions for over half of Germany’s electricity and gas networks.
LBD, a business management consultant, said in a report commissioned by regional energy supplier Lichtblick that E.ON stands to become the largest electricity supplier in two-thirds of Germany.
The monopoly game
E.ON denies that taking over Innogy would give it a dominant position in Germany’s power market. After the Innogy takeover, E.ON would sell about 20 percent of the country’s electricity, a spokesman said. The company has not responded to claims it might dominate the domestic gas market.
Based in the German industrial city of Essen, E.ON played down the EU questionnaires, describing it as “normal procedure.” The company itself has named approximately 1,000 competitors, customers and suppliers in Europe who received the question forms.
But Germany's Cartel Office also has a say. While Brussels is unconcerned by RWE's proposed stake in E.ON, the issue is a sticking point with the Bonn-based agency, which said it would await completion of the EU review before scrutinizing the matter.
Trouble with the east ... and Brexit
Resistance to the deal is growing in Eastern Europe, in particular, where there has been a storm of criticism against what is seen as a veiled attempt by the two German power giants to carve up the continent's markets.
In Slovakia, the combined market share of E.ON and Innogy mean the former will probably have to divest activities, analysts say. Over in Poland, the government has surprisingly put Innogy’s local subsidiary on a list of strategically important companies, a move seen as an attempt to bring the power supplier under state control.
In the Czech Republic, E.ON must grapple with still further players. There, Australian investor Macquairie, a minority shareholder in Innogy’s Czech gas network, is insisting on a change-of-control clause granting it a right of first refusal. Some municipal utilities in Germany have similar rights.
Finally, the merger process could face further delays due to Brexit. While the proposed merger including Innogy’s UK activities is currently registered in Brussels, part of regulatory supervision would revert to Britain if it exits the EU soon.
Jürgen Flauger covers the energy market for Handelsblatt. Till Hoppe is a Handelsblatt correspondent in Brussels, reporting on the European Union. Jeremy Gray is an editor at Handelsblatt Today. To contact the authors: [email protected], [email protected], [email protected]