Setbacks signal tough expansion for German utilities

Fri Dec 23, 2011 10:57am GMT

Quotes

   

* E.ON loses EDP bid to China Three Gorges

* Analysts say E.ON's fate not tied to EDP stake

* RWE, Gazprom end talks

* Analyst expects RWE to talk to regional partners

By Christoph Steitz

FRANKFURT, Dec 23 (Reuters) - E.ON EONG.DE and RWE (RWEG.DE), Germany's top utilities, need fresh ideas for their expansion strategy after setbacks this week that suggest it will not be easy for them to find growth and lower debt in a post-nuclear world.

E.ON (EONGn.DE) on Thursday lost a bid for Portugal's stake in EDP (EDP.LS) -- a move that would have given it exposure to the fast-growing Brazilian market and increased its renewables reach -- while RWE (RWEG.DE) said talks with Russia's Gazprom (GAZP.MM) about power production ventures had failed. [ID:nL6E7NM2I9] [ID:nL6E7NM1BG]

Even though analysts said the collapse of these deals would not have a major impact on the companies short term, the events highlight how difficult it is for them to find for growth abroad following Germany's decision to abandon nuclear power earlier this year.

"A strategic minority stake in EDP would have contributed a lot to E.ON's future growth strategy in renewables and high-growth overseas markets," said Michael Schaefer, analyst at Equinet, but kept an "accumulate" rating on E.ON's stock.

Portugal this week awarded its 21 percent stake in EDP to China Three Gorges after the Chinese company offered a 53 percent premium to the share price.

Portugal's decision comes amid continued nervousness over euro zone debt, and some industry analysts had said picking E.ON would have served as a sign of unity in the crisis-hit bloc. [ID:nL6E7NG2SF]

Portugal had lobbied in Germany and France for investments in the debt-stricken southern European country's energy sector.

In a response to the lost bid, E.ON confirmed it would spend 7 billion euros ($9.2 billion) on its green energy business over the next five years. [ID:nL6E7NF5EE]

Utilities in Europe's biggest economy are looking for ways to offset the decision by German Chancellor Angela Merkel to exit nuclear power production permanently after the Fukushima disaster in Japan earlier this year.

"Yes, it definitely would have been a first step in the right direction, it would have given them a stronger foothold in the Brazilian market and fit into their renewable strategy," said Helmut Edelmann, director utilities at Ernst & Young, of E.ON's failed EDP bid.

"But it should not be overestimated. It still was just about a 21 percent stake," he added.

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For an ANALYSIS on the EDP sale [nL3E7NN0VO]

For a story on E.ON's renewable strategy [nL6E7NF5EE]

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EASTERN PROMISES?

Germany's decision to exit nuclear power had also prompted its largest utilities to look to Russia for investments and as a source of natural gas for low-carbon power production.

RWE and Russia's Gazprom said this week they had terminated talks about joint power production ventures after what RWE Chief Executive Juergen Grossmann said was a failure to agree a "framework for cooperation".

RWE had wanted a deal with Gazprom to comprise plants fired by hard coal and brown coal, as well as the gas-fired plants that would be a natural fit for the Russian company.

While RWE did not say why the talks failed, sources close to the matter said the cooperation partly fell through because Gazprom struck a deal with Danish utility Dong [DOENRY.UL] earlier this year to explore opportunities for promoting gas-fired power generation in Europe.

WestLB analyst Peter Wirtz said a possible joint venture could have helped speed up RWE's efforts to raise 11 billion euros to cut its debt.

"A JV (joint venture) with Gazprom could have been a major step ahead but that was always far from being clear," Wirtz said.

"We were always sceptical on the strategic rationale to create a win-win story. And it was never fully clear whether Gazprom was prepared to pay a premium for getting an entry point into a major European power portfolio."

While Gazprom Chief Executive Alexei Miller did not rule out further talks with RWE, LBBW analyst Bernhard Jeggle said he expected RWE to push ahead with its intention to find other JV partners.

"To achieve this, it now could target regional partners," he said, keeping a "hold" rating on the company's shares.

($1 = 0.7654 euros)

(Additional reporting by Tom Kaeckenhoff and Daniela Pegna; Editing by Jodie Ginsberg)

((christoph.steitz@thomsonreuters.com)(+49 69 7565 1269)(Reuters Messaging: christoph.steitz.thomsonreuters.com@reuters.net)) Keywords: E.ON/EDP

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