Activist Investor

E.ON Feels the Heat

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E.ON is splitting up in two, with one part still operating fossil fuels.
  • Why it matters

    Why it matters

    A U.S. investment fund is urging E.ON to shed its regional electricity and natural gas grids, adding the utility to a list of leading German firms under fire by so-called activist investors.

  • Facts

    Facts

    • E.ON, Germany’s biggest utility, is on the verge of spinning off its gas and coal electricity operations.
    • The investment fund Knight Vinke, which holds a less than 3-percent stake in E.ON, wants to exert pressure on the company to sell off its regional networks too.
    • E.ON’s grid spans some 835,000 kilometers in Germany, Sweden, Eastern Europe and Turkey.
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    Audio

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When E.ON shareholders meet on June 8 in Essen, they will participate in a historic vote on whether Germany’s biggest utility should spin off its gas and coal electricity operations, which have formed the crux of the firm’s business for decades.

Such a radical strategy shift would send shockwaves beyond E.ON, setting a precedent for other big German energy firms.

But for one influential E.ON investor, the plan does not go far enough.

According to Handelsblatt sources, investment firm Knight Vinke is urging E.ON’s Chief Executive Johannes Teyssen to pursue a more dramatic shake up by simultaneously shedding another important business, its regional electricity and natural gas grids.

That would mean stepping away from a division which Mr. Teyssen aimed to focus on as part of his revamped and greener business plan. If the investor’s goal became reality, E.ON would only be left with its renewable electricity operation and sales.

The investment firm shows little sign of giving up without a fight.

In a letter to his investors, founder and chief executive Eric Knight made his position clear. “We have actively tried to convince the supervisory board and management board of E.ON that a separation from the regulated network business makes sense,” he wrote.

And the investment firm shows little sign of giving up without a fight. The planned flotation of the fossil fuel businesses is “a very encouraging first step,” Mr. Knight said.

E.ON declined to comment on the development. Mr. Teyssen, however, is likely to take the suggestion seriously. At first glance, Knight Vinke is not as noisy as some of the other so-called “activist investors” who seek and influence business strategy. Volkswagen, for example, is under pressure from the hedge fund TCI, which wants the auto giant to slash some 30,000 jobs, among a string of demands.

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But Knight Vinke does have a record for persistence. The investment firm spent years pressuring the Italian oil producer Eni to sell its Snam pipeline operations – which the company eventually did. It also conquered a seat on the management board of the French consumer electronics firm Darty, forcing the retailer to retreat from its international markets and merge with a rival.

In recent years, Knight Vinke made headlines with its involvement in the Swiss bank UBS. The investor called on the UBS management to sell its investment banking operations and focus on wealth management. But its plan failed and in 2015 Knight Vinke sold its holding.

But now its E.ON’s turn in the firing line. “We are currently concentrating on our stake in E.ON, one of the biggest gas and electricity providers worldwide,” the letter said.

The investment fund first snapped up its stake in E.ON in 2014, before Mr. Teyssen announced his radical overhaul of the company. Back then the investor took hold of less than 3 percent of the utility.

Sources close to Knight Vinke, however, stressed that the holding was seen as a long-term investment and was “gradually” increased.

But Mr. Teyssen is unlikely to appreciate the rationale for selling off its electricity grids. In his eyes, the networks are a key component of the more streamlined E.ON. The utility’s conventional electricity productions and gas are to be put under the remit of a new company Uniper, allowing E.ON focus to on its greener business, in keeping with Germany’s transition towards renewable energy sources.

If Mr. Teyssen’s vision materializes, E.ON will only produce clean energy and will offer new products and services to its some 30 million customers. The electricity grids are set to be merged with the Internet, thus enabling new business models. And it owns an extensive network: E.ON’s grid spans some 835,000 kilometers in Germany, Sweden, Eastern Europe and Turkey.

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This operation has also long served as a strong source of earnings. Profits are limited but reliable, as the grid operations are controlled by official regulators. Last year, E.ON’s grid operations provided earnings before interest and tax of €1.8 billion, or $2.02 billion. Under the new company structure, this earnings motor would fuel half of the company’s income, explaining the popularity of electricity and gas networks with financial investors.

Knight Vinke shares this assessment, but argues that E.ON could profit more handsomely from selling off its grids.

The influential investor said that, because of the regulations, synergies with the utility’s other businesses are limited: “Regulated infrastructure businesses are far more highly valued, when they are independent than when they are part of a conglomerate.”

 

Jürgen Flauger covers the energy market for Handelsblatt, including electricity and gas providers, international market developments and energy policy. To contact the author: flauger@handelsblatt.com

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