E.ON is not only the largest energy and electricity suppliers in Germany, but also one of the biggest worldwide. In 2014, the Dusseldorf located company achieved a turnover of € 111.556 billion and an EBIT of € 4.664 billion.
However, the internationally operating energy provider is going to change its positioning dramatically. There are problems, partly due to the energy transition towards sustainable energy, which are now to be counteracted in the course of a restructuring of the group. With the new strategy, E.ON responds to the price fall in wholesale electricity prices that have fallen drastically because of overcapacity in power plants and the development of green electricity prior to the company’s drastic decision. According to E.ON, two distinguished energy markets established themselves in recent years due to massive changes in the energy market: the conventional energy market with nuclear-, gas- and coal-energy as well as a new market, which focuses on green energy and networks. E.ON reckoned in recent years that these two markets have different requirements to a company and that the old positioning no longer matches them. In response, E.ON is going to split the conventional energy business of coal, gas and nuclear energy, energy trading and exploration business (extraction of raw materials) off. The remainder of the company would concentrate on a trio of new core businesses: renewables, networks and customer solutions. E.ON original shareholders retain a majority stake in the new company and a minority of the shares will be sold on the stock market. Shareholders could benefit from the fact that the moderate outlook for the conventional energy business no longer suppresses the share price of the company. In fact, current analysis studies have voted consistently positive to E.ON and recommend a purchase of shares. The realization of the bullish forecasts remains absent so far and the price is only oscillating sideways.
The majority of shares in the new company makes the loss of control probably acceptable and much of diversification (in front caused by the wide-scale structure of E.ON) is lost. The new company, based in Dusseldorf and going to be named Uniper, is going to be run by the previous E.ON CFO, Klauf Shepherd. Johannes Teyssen maintains his position at E.ON.
Suppose E.ON’s statement that both mentioned markets must be viewed completely differently is indeed true, then the splitting bears both new risks and opportunities for both companies. Fluctuations in one of the two markets could previously be smoothed while now both companies are completely exposed to their very own market. As long as the respective market is going well, this results in no problems and might even be beneficial, since then (as already mentioned) the perhaps more pessimistic condition on the other market does not drag down the profits. In bad times, however, the problems need to be faced without the chance of having the other market working as a possible buffer. Given the energy turnaround the new split-off company is more likely to face hard times in the future. EON itself can unswervingly follow the new trends, while the spin-off company is forced into a very difficult market, regarding the long run. These perspectives could well be reflected in the price the new company receives in the initial share-offering. However, there are also positive aspects to be considered such as the possibility of state subsidies for ‘safe’ electricity, which can also be produced with coal and gas. That and the shut-down of more and more nuclear power plants could raise prices again.
The split can bring about a change of image of E.ON. Since the “dirty energy” cannot be connected directly with E.ON anymore, but rather a innovative, environmentally friendly company. However, the whole transaction sounds a bit as if E.ON would simply get rid of the unprofitable division in order to be able to devote to more pleasant topics. The splitting has another dubious aspect: The reserves of nearly 14.3 billion euros, which have been accumulated for the dismantling of nuclear power plants will probably be completely transferred to the new company. But experts doubt that the deconstruction can be fully accomplished with the mentioned sum. The additional costs would then simply be passed on. In addition, not all of these reserves are immediately available, but are invested in assets. A decrease in value of those assets could cause further problems.
Furthermore, synergies are lost, which must be overcompensated in order to make the reorganization profitable. Conversely, the two companies can specialize in their core areas and thereby create competitive advantages. Expansions can be made target-oriented and create great economies of scale.
….the company has the possibility completely to focus on its new and lucrative market and become a pioneer in the industry
If the transaction turns out to be favorable for E.ON, the company has the possibility completely to focus on its new and lucrative market and become a pioneer in the industry, maybe even across German boarders. First of all, however, the German position in the energy market will be significantly weakened. With the division the international competitiveness of Germany’s largest energy provider will be put to a hard test. Although both companies still belong to the German blue chips, the competition abroad would be enormous. In worst case scenario, that could even affect the geopolitical climate. The energy market is of great importance and a weaker Germany could for example provide the the Russian energy giant Gazprom with upwind.
Europe imports around 53% of its energy consumption and a large part comes from Russia. Some European countries’ electricity depends to more than 90% on Russia, which explains Russia’s influence and power to some extent. Further weakening of the inter-European energy market, and E.ON definitely plays a major role as Germany’s largest provider, would be totally against the interests of the EU, which currently discusses a reform of the European energy market in order to reduce the dependency on Russia.