E.ON set to maintain structure as nuclear liability payment nears – bankers
- Rationale of grids spin-off questioned
- Uniper shares may be used to fund nuclear liability shortfall
- Urenco sale remains challenging
E..ON [ETR:EOAN] is likely to keep its remaining major businesses following the spin-off of its conventional power generation and trading activities into Uniper [ETR:UN01], said several sector bankers and a minority shareholder.
Last September’s major reorganisation prompted speculation that the German group may be broken up further. Activist investor Knight Vinke wants to see the power distribution or grids business spun off as it believes E.ON should be a pure-play regulated network group. The other divisions are customer solutions and renewables.
But utility bankers and a minority shareholder questioned the logic for such a move. A spin-off of the grids business would “undermine the whole equity story” of E.ON, said one banker. Another added that the group needs the cash flow from the division, which contributed 60% of EBIT in 2015.
E.ON is unlikely to pursue further major corporate action while constrained by its nuclear liabilities, noted the first banker. E.ON, alongside RWE [ETR:RWE], needs to pay a hefty sum to a government fund, to which it will transfer the liability for interim and final storage of nuclear waste.
E.ON said in November that it would need to pay EUR 9.8bn, and had recorded provisions of EUR 7.8bn.
Any shortfall in the payment to the government fund could be made by selling a financial instrument – such as an exchangeable bond – using E.ON’s 47% holding in Uniper, suggested the shareholder. E.ON is reportedly looking to start reducing its holding from 2018. At current market prices, E.ON's stake in Uniper is worth EUR 2.35bn.
A rights issue is another option, the shareholder added. E.ON has permissions to increase its share capital by up to 10% without seeking further shareholder approval .
Knight Vinke believes any shortfall could be covered by noncore asset sales, according to a letter to shareholders.
Separately, E.ON and other German utilities are seeking compensation from the government for the early shutdown of their nuclear reactors. An abrupt volte-face in Germany’s energy policy following the 2011 Fukushima disaster in Japan, led to the phasing out of nuclear power.
A takeover of E.ON, hostile or friendly, was dismissed by two bankers who highlighted the almost insurmountable political and legal hurdles of acquiring an integrated German utility. A recent news report suggested that the company was speaking to advisers to defend itself against a hostile takeover.
The appointment of M&A or defence advisers is likely to be part of a normal mandate process undertaken by large companies every year or so, the third and fourth bankers said.
While the sources downplayed any major corporate action, most agreed that smaller asset sales are likely. In one of its biggest recent asset sales, E.ON divested it’s Norwegian E&P business for USD 1.6bn in 2015. Other E&P have been transferred to Uniper.
One option is the sale of its 50% share of Turkish electricity group Enerjisa, said the second banker, who noted that E.ON had appointed advisers to explore the sale several years ago. E.ON has electricity businesses across Europe, in the Czech Republic, Hungary, Italy, Romania, Slovakia and the UK.
The Essen-headquartered group has been looking to sell its holding in Urenco for some time, but this looks unlikely any time soon. E.ON and RWE jointly own a third of the uranium enrichment group, with the remainder owned by the Dutch and British governments. A sale or partial listing of Urenco has been mooted for years but is proving extremely complicated to execute due to the political nature of any deal, and issues surrounding non-proliferation.
A spokesperson for E.ON declined to comment.