German mega-deal to shake up UK energy sector

Bloomberg

The 22 billion-euro ($27.1 billion) deal that’s shaking up the world of German utilities also has a very British dimension. EON SE’s acquisition of Innogy SE will combine the two UK business they own, shrinking the country’s Big Six utilities to five at a time when both the government and main opposition party are pressing for lower bills.
It also emphasises Britain’s dependence on foreign companies for power and natural gas when it’s seeking to leave the European Union.
Britain has several nuclear and coal power plants due to finish their life in service in the next decade. That leaves the government seeking to balance the need for 100 billion pounds ($139 billion) of investment in its power system against voter demands for lower energy costs. EON and Innogy’s tie-up would be the biggest shakeup of energy suppliers in the UK in at least a decade.
“The fate of the UK customer businesses is in question,” said Meredith Annex, analyst at Bloomberg New Energy Finance.
“Having a few larger players with more power creates political concerns in an already sensitive market.”
The UK government said consumers have more choice than ever before and that it remains “committed to tackling the cost of consumers’ energy bills,” according to a statement from the Department of Business, Energy and Industrial Strategy.
“This will increase fairness in the market.”
The deal, involving a complex asset swap with Innogy’s chief shareholder RWE AG, raises a number of questions for the UK Those include:
CENTRICA’S POSITION
Centrica Plc is Britain’s biggest energy supplier, and no matter what happens it will be facing a bigger competitor, Annex said.
Since 2014, the UK government has focussed on increasing competition between energy suppliers following concerns that utilities were using their market power to boost consumer prices. While about 60 suppliers serve Britain, the biggest six companies still feed about 80 percent of households. Others in the Big
Six include Electricite de France SA, SSE Plc and Iberdrola SA’s ScottishPower business.

NPOWER’S FUTURE
Innogy works in the UK through its Npower unit, which has been losing money. In November, Innogy struck a deal to combine its retail operations with those of fellow Big-Six member SSE. It’s not yet clear whether that deal will move ahead if EON and Innogy succeed in their plan. SSE issued a statement saying it didn’t think the Npower deal would be affected.
“If the retail merger remains intact, EON’s ownership of Npower could make obtaining the necessary regulatory clearance more complex,” said Ahmed Farman, equity analyst at
Jefferies International Ltd.

MARKET CLOUT
One possibility: EON, Npower and SSE could all merge their customer businesses. That would leave them with 37 percent of the market, making them by far the biggest supplier, according to BNEF data. UK competition authorities may feel compelled
to investigate if the combined share surpasses 25 percent.
The other options are for SSE to abandon the deal or let it go ahead as planned. If it goes ahead, Innogy may have to sell its 34 percent stake in the new company formed by Npower and SSE, according to RBC Europe Ltd.

COMPETITION AUTHORITIES
Another fraught issue is who exactly should oversee the anti-trust investigation into the EON-Innogy deal. The European Commission is a natural candidate because of the size of the deal and since the utilities have operations across Europe.
It could also be German and British officials through the UK Competition and Markets Authority that seek a role in the deal. The CMA has already started a probe into the SSE-Npower merger. UK officials may feel compelled to act with Britain due to leave the EU in March 2019, even though the EC at the moment seems the more natural regulatory venue.
The EC “examines mergers of businesses with EU and global turnover above a certain size, including those that may have an impact in the UK,” the CMA says on its website. The
antitrust watchdog is talking to
both companies and looking into the implications of the deal.

EON to cut 5,000 jobs in deal to take over Innogy from rival RWE
Bloomberg

EON SE will shed as many as 5,000 jobs in the deal to take over Innogy SE, a move that marks the biggest shakeup in Germany’s energy
business in years.
The transaction agreed with its rival RWE AG values Innogy at 22 billion euros ($27.1 billion) and
will sharpen the focus of Germany’s leading two electricity and natural gas providers, according to a joint statement. EON billed itself as the first formerly-integrated utility to focus entirely on meeting needs of 50 million customers across Europe. RWE said it doesn’t expect any
net job losses.
EON targets savings of 600 million euros to 800 million euros by 2022. It would become a grid manager and power provider focused on meeting Chancellor Angela Merkel’s ambitious targets to cut pollution. For RWE, which is Europe’s biggest generator of electricity, the deal would provide it with renewables as an alternative to its current generation network that now is focused mainly on coal and nuclear power.
“It’s EON’s first real growth step for more than a decade,” EON Chief Executive Officer Johannes Teyssen said at a press conference on Tuesday in Essen, where all three of the utilities are based. “Our renewables businesses will find a promising home within a larger platform that will offer the necessary scale of size.”