In August, posters appeared on billboards all over Germany, asking a single, stark question: “What would you do if you could start afresh?”
The question was posed by the energy company RWE. Now the second half of its campaign is going live, with colorful posters and TV and radio advertisements announcing its own fresh start. RWE is introducing its new subsidiary to German consumers and investors. The company will inherit the “clean” parts of its parent company’s business: renewable energy, networks and retail. “Energy is becoming Innogy,” goes the confident catchphrase.
For Peter Terium, RWE’s chief executive, Innogy’s spin-off marks a new era of freedom for the parent company, which has been battered by Chancellor Angela Merkel’s drive to wean Europe’s largest economy off fossil fuels by 2050. But for investors, too, the company’s strategic shift offers significant opportunities.
The flotation will take place on October 7. With a volume close to €5 billion, around $5.62 billion, it will be the biggest share issue in Germany since Infineon and Deutsche Post came to market in 2000.
The countdown started this weekend. Innogy shares are on offer from now until October 6 at prices between €32 and €36. Some of the shares will come from Innogy’s own 10 percent capital hike. The money raised on this — €1.8 to 2 billion — will go toward Innogy’s own investment budget.
RWE will also sell part of its own stake in Innogy, putting at least another 10 percent of the company up for grabs, up to 15 percent if demand is strong. The capital raised from this will go to the parent company. Depending on price and volume, it will be something between €1.5 billion and €3 billion.
“What would you do if you could start afresh?”
RWE is deep in debt and urgently needs to raise cash. Its net debt at the half-year point was €28 billion. In addition, the company must pay billions to help cover the costs of dismantling nuclear and lignite power plants. And as if that were not enough, profits in its old core business — coal- and gas-powered stations — are collapsing. Fossil fuel generation is being driven off the market by heavily-subsidized renewable energy. In recent years, RWE has had to repeatedly absorb billions in write-offs and losses.
Investors have suffered, too. Since March 2011, when the shock of the Fukushima nuclear disaster radically shifted German energy policy, RWE shares have fallen almost 70 percent. This year, for the first time in many decades, the company will pay no dividend to shareholders.
Mr. Terium is currently running both companies; after the flotation, he will concentrate entirely on Innogy. His strategy is intended to bring in new investors.
“We think Innogy is an attractive investment,” he said recently. “As a company we want sustainable growth, and we want our shareholders to share in this through attractive dividends.”
Innogy is meant to appeal to investors interested above all in stable, reliable growth. Much of the company’s business is constrained by state regulation, which will limit profits but make them calculable over the long term. In the coming year, Innogy expects to have earnings before interest and taxes, or Ebitda, of between €4.1 billion and €4.4 billion. This figure will represent the bulk of RWE’s business. The parent company expects an overall Ebidta of between €5.2 and €5.5 billion. And Innogy promises healthy dividends: The company wants to pay out about 70 percent of net income, adjusted to exclude one-off effects.
Given ultra-low yields in other asset classes, Mr. Terium is convinced that Innogy shares will interest investment funds. One of the world’s largest institutional investors is already on board; on behalf of funds it manages, the American investment company Blackrock has already put in a binding purchase order for €940 million. “In terms of earnings, risk profile, and dividends, Innogy is more attractive than RWE,” wrote Commerzbank analyst Tanja Markloff in a recent report.
The new company will be a genuine stock market heavyweight. Its flotation price values it somewhere between €17.8 and €20 billion — considerably higher than analysts’ predictions. Sven Diermeier from Independent Research, for example, estimated it at €12.9 to €18.8 billion. The analyst recently raised his target price for RWE stock, and reaffirmed his “hold” recommendation.
More significantly, a valuation on this scale means Innogy will be worth more than twice as much as its parent company. RWE is currently valued at around €9 billion, with its market capitalization dragged down by debt, risks associated with the energy revolution, and the poor outlook for coal- and gas-powered energy. Since Fukushima, the company has seen €18 billion wiped off its value.
Innogy may become Germany’s most valuable energy company from scratch. Its rival E.ON is currently valued at €12.8 billion, with rival E.ON’s new fossil fuel subsidiary Uniper worth just €3.8 billion.
“In terms of earnings, risk profile, and dividends, Innogy is more attractive than RWE.”
Uniper’s own flotation took place just two weeks ago. E.ON Chief Executive Johannes Teyssen decided on his spin-off a year earlier than Mr. Terium, reacting to the same problematic conditions in the energy market. In some ways, however, Mr. Teyssen’s strategy is the opposite of RWE’s, which has kept its old core business, spinning off its “green” business into a new company. But E.ON decided to keep its own focus on renewables, networks and retail, while spinning off its “old” core business into Uniper: coal and gas power plants, wholesale, and gas production.
There is a further difference. RWE intends to maintain an ongoing majority stake in Innogy, whereas E.ON sold off 53 percent of Uniper at flotation and plans to sell the rest in 2018.
Uniper offers speculators more opportunities, but more risks too. E.ON itself is aiming for the same market segment as Innogy: investors looking for stable, steady businesses with predictable returns. But after conversations with many large financial players, Mr. Terium is confident that he can convince investors that Innogy’s model is very much worth it.
Jürgen Flauger covers the energy market for Handelsblatt, including electricity and gas providers, international market developments and energy policy. To contact the author: email@example.com.