The following Financial Times article was syndicated in the AFR today. It provides a brief insight into the pressures facing RWE and EON. Whilst the national priority is to replace nuclear, the existing debt and falling income of these two companies do not bode well for a quick or wholesale leap into innovative energy solutions such as distributed generation. Perhaps an insight into why the EON deal faltered. Our saviour could be elsewhere?
German Futilities: Some questions are tougher than others. Red or white? Still or sparkling? United or City? RWE or Eon? When it comes to the German utilities, the answer is invariably “neither, thanks”.
Never mind the colossal loss of value over five years; the more worrying trend in the year-to-date is the growing divergence in the sharemarket performance of the German giants – RWE down a third, Eon down 15 per cent – compared with, say, France’s EDF, which is up nearly 60 per cent.
Second-quarter results this week from RWE and Eon will shed some light on why this is happening. Their operating income could be down by at least 10 per cent as a result of lower electricity prices, continued restructuring at both companies, and factors associated with Germany’s Energiewende – an energy policy based on elimination of nuclear power and a rising share of renewables. No European country has so comprehensively undermined the business model of its big power utilities as has Germany.
This week’s numbers may also give pointers to the predicament faced by RWE and Eon in the long term. Citi Research estimates that neither offers earnings growth up to 2022. More worryingly, neither will be able to reduce its net debt below a multiple of three times its earnings before interest, tax, depreciation and amortisation any time soon. Eon had net debt of €31 billion ($45 billion) at the end of the first quarter; RWE had €33 billion. (Each is a little more than three times 2012 EBITDA.)
The question for investors is whether RWE and Eon can continue to service this load while also paying dividends and maintaining their credit ratings. Their ability to do so rests a great deal on their turnaround strategies, which are both similar (cost-cutting and restructuring) and different (RWE concentrating on Europe, Eon on emerging markets).
Even then, the risk is that they have to raise new equity. Until then, the answer to the question “RWE or Eon?” remains weder noch, danke.
Financial Times
CFU Price at posting:
4.3¢ Sentiment: LT Buy Disclosure: Held
