Speculation has swirled around Innogy this week.
On Monday, the utility published its first full set of results since its split from RWE last year. The results were unspectacular, but they did enable Innogy to pay dividends of €683m to parent company RWE. These dividends are a major boost for RWE, which last month revealed losses of €5.7bn in 2016 – the largest loss in its 119-year history – after being forced to make writedowns of €4.3bn on its power plants in Germany.
This appears to be an early vindication of the German group’s decision to split, with renewables-focused Innogy supporting fossil fuels-focused RWE. More on that later.
Following Innogy’s results, the story took an interesting turn on Tuesday as the firm was the subject of an intense – but short-lived – bout of takeover talk. RWE confirmed that it is considering selling a 26% stake in Innogy, which would be worth around €4.8bn. In our view, though, it is a strange time to make such a move.
Let’s look back at the rationale behind the RWE-Innogy split. In recent years, RWE has been weighed down by the poor financial performance of its fossil fuels assets, as a result of Germany’s move towards more renewable sources; and of its nuclear assets, on which the country has turned its back since Japan’s Fukushima disaster of 2011 and where RWE has been landed with huge bills for decomissioning. It is worth noting that similar factors also drove RWE’s rival E.On to a €16bn loss in 2016.
In response, RWE last year spun off its renewable energy and grid assets into Innogy, with the idea that Innogy would be a key driver of the group’s growth and would support RWE’s legacy fossil fuels and nuclear arms. It is a sound strategy that bore its first fruit in the €683m dividend payments that were revealed this week.
In October, RWE also raised €5bn by listing 23% of Innogy on the stock exchange in Frankfurt, which gave it a further financial boost. And, this week, RWE made it clear it is considering other strategic options, including reducing its 77% stake in Innogy to 51%. If it were to sell this 26% stake, it would be worth around €4.8bn.
Speculation swirled on Tuesday that French giant Engie was interested in buying the stake, but Engie’s CEO Isabelle Kocher has since denied any interest. She said the utility is not looking for a transformative deal and would not buy a minority stake. This may just be coded language for another type of deal, but we'll see.
But we can’t understand why RWE would sell a stake in Innogy now. It split the renewables and fossil fuels assets into two companies last year so that Innogy could be the key driver of its growth. We don't see why RWE would reduce its income from Innogy in the coming years, even in return for a €4.8bn boost.
In the wind sector, for example, we see good growth prospects for Innogy. It already has 3.7GW of renewables capacity in operation, including 107 onshore wind farms, and is this year set to bring its 336MW Galloper and 332MW Nordsee One schemes online.
It is also working on plans for other big offshore projects including Triton Knoll. These could significantly boost Innogy’s returns in the coming years, and help to increase the value of the company.
The utility is also innovating in areas including battery storage. In our view, it would be more sensible for RWE to explore other strategic options and leave its stake in Innogy intact. Ignoring a major payday now then it may lead to a bigger one later.
That is not to say that Innogy’s future is challenge-free. Its onshore wind operations are located in countries that are cutting support: Germany, Italy, the Netherlands, Poland, Spain and the UK. It is facing slow growth due to uncertainty in the eurozone and, indeed, predicted flat growth in sales and profits between 2016 and 2017.
But these are not areas where a new shareholder can bring much value, and any big change also means disruption. Speculation will continue following RWE's statements this week, but good sense must prevail.
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