Being a shareholder in the German utility RWE has not been a nice place to be over the last two years with the stock price down circa 60% with the recent share price increase (15% this week) a mere “dead cat’s bounce.” This catastrophic share performance reflects the monumental changes and challenges facing RWE from the pressure on power generation margins across Europe, to uncertainty around the decommissioning of their German nuclear fleet, to the risks in relation to the carbon emissions of the company’s generation fleet which make RWE Europe’s biggest emitter of CO2 in the world. Then there of course is the disastrous mistakes by management particularly with regards capital allocation. One of the worst decisions was the 2009 purchase of Essent, the Dutch utility. It cost €9.3bn and to date RWE has written off €3.6bn of that investment, and over the last six years the company has taken €9.4bn in impairment charges noting that management has already stated that there is more to come in the current quarter!
Now management has reacted by cutting dividends, selling businesses, reducing costs and raising equity (€2bn in 2011) but it has not helped the share price or the credit rating of the company. The issue is very clear investors do not believe in the business model of RWE nor do they believe that they can make their cost of capital going forward.
So when I heard a week ago RWE CEO Peter Terium say that they needed new capital for growth and that it was very difficult for them to get that capital, my advice would have been very simple, show me your vision, show me your new business plan and show me how you can develop a return on that new capital. I saw none of this in their latest “Transforming RWE” presentation earlier this week. Instead, management announced a restructuring of the company with the grid, renewables and supply business (Newco) being carved out of RWE. This will leave RWE with the conventional generation and trading and the majority shareholding in Newco, which will plan to be IPOed by the end of 2016 with at least 10% new capital coming in through that listing.The new structure means that RWE may be able to raise that capital in NewCo at a better valuation than if it was just RWE. But is that a change in strategy? No! It is just some financial engineering. Only time will tell us if it works but let’s not forget that we have seen this before. Iberdrola, Enel, EDF have all done something similar by listing on the public markets their renewable divisions and two of which where bought back by their parent companies at lower valuations than they were IPOed meaning that the only shareholders who lost were the new investors! Will equity investors really believe RWE? And what about debt investors who are currently paying 125bps, and double what it was one year ago, to insure against default on 5 year debt?
I have my doubts and whatsmore even if it works it is not a sustainable solution. The only sustainable solution is to show us a vision, a new business plan and some numbers which help investors to believe that returns going forward can be greater than the cost of capital. But that requires a radical change in strategy as well as bravery and leadership across management, board members and existing shareholders. And I doubt whether that willingness to change and embrace the new energy world is there.