Why would EnBW buy Prokon?

Glossy TV adverts, big growth plans, and promised returns of up to 8%. It is no surprise that German developer Prokon was able to attract €1.4bn in investment from the public.

But for consumer organisations it was little surprise when all of this came crashing down early last year. In January 2014, the company filed for insolvency after investors withdrew investments of €280m in 2013 and 2014. The reason for the exodus is that Prokon’s business model had been widely described as a Ponzi scheme, although the company said it was merely “unconventionally financed”. Creditors are still waiting to agree a settlement.

Now an end is in sight. In July, its creditors are set to vote between two recapitalisation options for the firm. The first option is continuing Prokon as a cooperative; and the second option is selling Prokon to Germany’s third-largest utility, EnBW, through a share deal. Last Wednesday, EnBW was selected as preferred investor to buy Prokon in a €500m deal.

Like Prokon, EnBW has been struggling with its own problems.

As with other European utilities, its fossil fuel operations have been suffering as countries including Germany have shifted towards renewables, mainly wind and solar; and the firm revealed last week that first quarter Ebitda in its renewables division fell 16.9% year-on-year to €35.5m.

It said this was a blip and that its results would look healthier after the 288MW offshore wind farm Baltic 2 is commissioned this year.

Even so, why does it want to touch Prokon?

Here is the short explanation of the problem. Prokon was formed in 1995 and raised €1.4bn by selling ‘profit-participation certificates’ to 75,000 creditors. These certificates do not give creditors any say in the running of the company, as traditional shares do; and also mean investors are liable for losses in the company. It sold these promising a 6%-8% return.

The business model proved highly controversial.

Consumer advocates warned that the developer’s generous returns were not being paid from profits generated by the wind farms, but were instead being paid out using fresh money from new investors — which they said is effectively a Ponzi scheme. The German courts also said investments were not being used to fund new developments; and had also accused the company of fraud.

Ponzi. Opaque. Fraud. Three words that would usually get would-be buyers running away from a potential investment at high speed.

But, in this case, EnBW is right to pursue its interest. It would be buying Prokon’s assets but ditching its financing methods.

By buying Prokon, EnBW would be able to buy its 54 operational wind farms in Germany and Poland with combined capacity of 537MW; and a pipeline of 170 projects in Germany, Poland and Finland. This would be a great boost for EnBW, and enable the utility to shift towards renewables in a high-profile one-off deal. Such deals do not come along often.

It also offers creditors a way to exit their troubled investments and, crucially, a clean break from Prokon. Continuing to run the company as a cooperative does not offer that closure.

We will only know after Prokon's creditors vote in July.

Glossy TV adverts, big growth plans, and promised returns of up to 8%. It is no surprise that German developer Prokon was able to attract €1.4bn in investment from the public.

But for consumer organisations it was little surprise when all of this came crashing down early last year. In January 2014, the company filed for insolvency after investors withdrew investments of €280m in 2013 and 2014. The reason for the exodus is that Prokon’s business model had been widely described as a Ponzi scheme, although the company said it was merely “unconventionally financed”. Creditors are still waiting to agree a settlement.

Now an end is in sight. In July, its creditors are set to vote between two recapitalisation options for the firm. The first option is continuing Prokon as a cooperative; and the second option is selling Prokon to Germany’s third-largest utility, EnBW, through a share deal. Last Wednesday, EnBW was selected as preferred investor to buy Prokon in a €500m deal.

Like Prokon, EnBW has been struggling with its own problems.

As with other European utilities, its fossil fuel operations have been suffering as countries including Germany have shifted towards renewables, mainly wind and solar; and the firm revealed last week that first quarter Ebitda in its renewables division fell 16.9% year-on-year to €35.5m.

It said this was a blip and that its results would look healthier after the 288MW offshore wind farm Baltic 2 is commissioned this year.

Even so, why does it want to touch Prokon?

Here is the short explanation of the problem. Prokon was formed in 1995 and raised €1.4bn by selling ‘profit-participation certificates’ to 75,000 creditors. These certificates do not give creditors any say in the running of the company, as traditional shares do; and also mean investors are liable for losses in the company. It sold these promising a 6%-8% return.

The business model proved highly controversial.

Consumer advocates warned that the developer’s generous returns were not being paid from profits generated by the wind farms, but were instead being paid out using fresh money from new investors — which they said is effectively a Ponzi scheme. The German courts also said investments were not being used to fund new developments; and had also accused the company of fraud.

Ponzi. Opaque. Fraud. Three words that would usually get would-be buyers running away from a potential investment at high speed.

But, in this case, EnBW is right to pursue its interest. It would be buying Prokon’s assets but ditching its financing methods.

By buying Prokon, EnBW would be able to buy its 54 operational wind farms in Germany and Poland with combined capacity of 537MW; and a pipeline of 170 projects in Germany, Poland and Finland. This would be a great boost for EnBW, and enable the utility to shift towards renewables in a high-profile one-off deal. Such deals do not come along often.

It also offers creditors a way to exit their troubled investments and, crucially, a clean break from Prokon. Continuing to run the company as a cooperative does not offer that closure.

We will only know after Prokon's creditors vote in July.

Glossy TV adverts, big growth plans, and promised returns of up to 8%. It is no surprise that German developer Prokon was able to attract €1.4bn in investment from the public.

But for consumer organisations it was little surprise when all of this came crashing down early last year. In January 2014, the company filed for insolvency after investors withdrew investments of €280m in 2013 and 2014. The reason for the exodus is that Prokon’s business model had been widely described as a Ponzi scheme, although the company said it was merely “unconventionally financed”. Creditors are still waiting to agree a settlement.

Now an end is in sight. In July, its creditors are set to vote between two recapitalisation options for the firm. The first option is continuing Prokon as a cooperative; and the second option is selling Prokon to Germany’s third-largest utility, EnBW, through a share deal. Last Wednesday, EnBW was selected as preferred investor to buy Prokon in a €500m deal.

Like Prokon, EnBW has been struggling with its own problems.

As with other European utilities, its fossil fuel operations have been suffering as countries including Germany have shifted towards renewables, mainly wind and solar; and the firm revealed last week that first quarter Ebitda in its renewables division fell 16.9% year-on-year to €35.5m.

It said this was a blip and that its results would look healthier after the 288MW offshore wind farm Baltic 2 is commissioned this year.

Even so, why does it want to touch Prokon?

Here is the short explanation of the problem. Prokon was formed in 1995 and raised €1.4bn by selling ‘profit-participation certificates’ to 75,000 creditors. These certificates do not give creditors any say in the running of the company, as traditional shares do; and also mean investors are liable for losses in the company. It sold these promising a 6%-8% return.

The business model proved highly controversial.

Consumer advocates warned that the developer’s generous returns were not being paid from profits generated by the wind farms, but were instead being paid out using fresh money from new investors — which they said is effectively a Ponzi scheme. The German courts also said investments were not being used to fund new developments; and had also accused the company of fraud.

Ponzi. Opaque. Fraud. Three words that would usually get would-be buyers running away from a potential investment at high speed.

But, in this case, EnBW is right to pursue its interest. It would be buying Prokon’s assets but ditching its financing methods.

By buying Prokon, EnBW would be able to buy its 54 operational wind farms in Germany and Poland with combined capacity of 537MW; and a pipeline of 170 projects in Germany, Poland and Finland. This would be a great boost for EnBW, and enable the utility to shift towards renewables in a high-profile one-off deal. Such deals do not come along often.

It also offers creditors a way to exit their troubled investments and, crucially, a clean break from Prokon. Continuing to run the company as a cooperative does not offer that closure.

We will only know after Prokon's creditors vote in July.