EUR 850.00 For Business Accounts Only

Morningstar | Acquisition of Innogy's Networks and Retail Activities by E.On to be Completed in Second-Half 2019

Innogy was created in 2016 by the spin-off of RWE's distribution, renewables, and supply activities. RWE retained 77% of Innogy's capital after the spin-off.Under a March 2018 agreement, E.On will acquire all of RWE's stake in Innogy. In return, RWE will receive a participation of 17% in E.On and most of E.On's renewables business, while RWE will keep Innogy's renewables and gas storage business. E.On will carry out a 20% capital increase and get a EUR 1.5 billion cash payment from RWE. Last but not least, E.On intends to buy out Innogy's 23% minorities at EUR 40 per share, consisting of an offer price of EUR 36.76 per share plus Innogy's dividend for 2017 and 2018. We recommended back then that Innogy's shareholders accept E.On's offer.At the end of its extended offer period in July 2018, E.On had acquired 9% of Innogy stock out of a total minorities share of 23%. The remaining 14% of minorities that did not tender their shares to E.On could be compensated through shares in the merged Newco, a guaranteed dividend, or a compensation payment. Altogether, Innogy's share price is driven by risk arbitrage and not by fundamentals.In February 2019, the acquisition of Innogy's renewables was cleared by the EU commission. In March 2019, the commission opened an investigation on the acquisition of Inngoy's networks and retail by E.On, which is normal for a transaction of this size. We think the risks that the deal is not cleared are limited. Networks' returns are set by the regulators so any dominant position in a given country is not an issue. Regarding the retail business, the most significant risk is in Germany where Innogy and E.On are the two biggest players. Therefore, E.On might be required to shed Innogy's German retail business, which would not jeopardize the overall deal that should be completed by year-end as scheduled. Before the deal, we had a cautious view on Innogy’s fundamentals, driven by the returns reduction for regulated networks and margin pressure in no-moat retail activities. Our view is more positive on the renewables division. Accordingly, as we wrote after the deal announcement, we view the deal’s rationale as stronger for RWE than for E.On.