Mega-merger between E.ON and RWE’s Innogy will shake up UK energy industry

The mega-deal between German energy giants E.ON and RWE doesn’t just shake up the UK’s energy sector, it props up a shift towards renewables which could fuel a new wave of mergers and acquisitions in the mid-market.

E.ON, Germany’s biggest investor in renewable energy (the company has more than US$12.4 billion in wind and solar including storage), recently agreed to acquire competitor RWE’s green energy business Innogy for around 22 billion euros ($27.1 billion).

The merger will include a complex swap of assets and shares – including E.ON handing the renewable energy portion of Innogy alongside its own renewable energy assets to RWE. The idea being that E.ON is leaving green energy altogether, instead focusing on supplying energy to customers and managing grids.

RWE, on the other hand, will focus on power generation and energy trading, bolstering its existing fossil fuels assets with a shiny new portfolio of wind farms and creating Europe’s third-biggest renewable energy producer.

Reaching Critical Mass

The merger will have a major impact on the renewable sector in the UK, making RWE one of the largest players in the market. The energy giant has also potentially signaled an appetite for consolidation as they compete in European government auctions for renewable energy subsidies.

“Critical mass is the key in renewable energy,” RWE CEO Rolf Martin Schmitz told reporters in mid-March. “Before this transaction, neither RWE nor E.ON was in this position.”

Renewable assets were an investment priority in 2017 with deals in clean energy growing 24 percent in value and 29 percent in volume, according to EY’s Power Transactions and Trends: 2017 review and 2018 outlook.

EY says it expects more acquisitions and dealmaking between energy companies and small to mid-market players in renewables and new energy technology including batteries.

The report’s authors pointed to French oil and gas company Total’s acquisition of a 23 percent stake in Eren, a renewable energy company, for €237.5 million (US$284.8 million) with an option to buy the company after a period of five years.

And there are plenty more examples.

In November, U.K.-based energy giant Centrica purchased REstore, a Belgian company focused on energy demand response for €70 million (US$81.4 million) in cash. It was another in a string of purchases including $60 million for building sensor startup Panoramic Power in 2015, US$249 million for Danish energy trading platform Neas Energy and US$212 million for combined heat and power provider ENER-G Cogen – both purchased by Centrica last year.

But it’s not just the giants doing the acquiring. Mid-sized UK player Drax Group acquired electricity provider Opus Energy last year for £340 million (US$453 million) and Eneco, based out of The Netherlands, invested in both Next Kraftwerke, a virtual power plant developer, and LichtBlick, a renewable energy provider.  Eneco also acquired Quby, a Dutch smart thermostat company.

A Mid-Market Energy M&A Spree

For mid-sized businesses, acquiring startups helps them elevate their capabilities and clinch new business opportunities while neutralizing potential threats. And as Matthias Dill, managing director of Germany-based Statkraft Ventures, a venture capital fund backed by Norwegian energy firm Statkraft, told Greentech Media, the M&A spree is just getting started:

“I think the appetite for acquiring startups will really increase over the next few years,” Dill said. “We see three fundamental trends driving M&A activity in the energy sector: Incumbents embracing distributed energy, startups becoming relevant players in the energy sector, and players from other sectors entering the energy sector. The exciting part is that all of this is happening at the same time.”

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Andrew Seale

Andrew Seale is a Toronto-based business writer who contributes frequently to Yahoo Canada Finance, The Globe and Mail's Report on Business and The Toronto Star.