Investors Hope RWE’s Gulf Dream Offers Cash Or New Markets

Working with a deep-pocketed Gulf backer could be just what RWE boss Peter Terium needs to restore shareholder confidence and escape budget constraints that have plagued Germany’s top power producer.

The utility last week disclosed it was in talks with an unnamed Gulf investor, raising hopes that it could receive fresh funds and emerge from a crisis that has saddled it with 31 billion euros ($33.6 billion) of debt.

The talks, which sources say are at a preliminary stage, come when the 117-year-old German group is desperately looking for ways to reinvent its business model after a surge in renewable capacity and weak energy demand across Europe sent wholesale prices and profits into a decline.

“You have a company with no money and lots of knowledge and an investor awash in cash but without any expertise,” a senior source familiar with the matter said when asked about the rationale behind any form of cooperation.

Terium, 51, is no stranger to transformative deals, having helped to engineer RWE’s 8.2 billion euro takeover of rival Essent in 2009.

The soft-spoken Dutchman is under pressure to deliver after bigger rival E.ON announced last year it would spin off its troubled power generation unit.

But Terium might have to settle, for now at least, for a partnership deal with a new backer because of opposition from cash-strapped German municipal shareholders who would not want their stakes diluted in a capital increase.

NEW MARKETS

A cooperation agreement would make sense too.

RWE already has a foothold in the Gulf after forming a joint venture with state-run utility Dubai Electricity & Water Authority (DEWA) in 2012 to provide consulting services to investors, energy suppliers and governments.

Last year, RWE won a contract to help Dubai set up an energy agency, whose aim is to boost growth in the emirate via energy efficiency measures.

Dubai, where energy demand grows by about 5 percent per year compared with a stagnant Europe, in January more than doubled its target for renewables in its overall energy mix given the falling cost of solar power.

“Investors from the Arab region would be interested in German know-how, which is considered top notch globally,” a senior adviser said, declining to be named.

RWE, in turn, is aiming for financially potent investors in its renewable energy strategy. It would trade its expertise in operation and maintenance for funds to finance assets it can’t afford on it own, notably offshore wind parks, which carry a price tag of at least 1 billion euros apiece.

OWNERSHIP SHAKE UP?

Middle East investors have long seen Europe as a place to splash out billions of euros. Qatar is the most active player, with stakes in the Shard, London’s tallest building, as well as companies including Sainsbury’s, Volkswagen and Spanish utility Iberdrola.

With RWE’s cash reserves depleted, Terium needs to rebuild confidence in the group’s shares which have dropped by a quarter since he took over as CEO in 2012, losing almost 5 billion in market value.

The reported Gulf interest will help sentiment.

“It’s a signal to other shareholders that there is confidence in the business model,” said Thomas Deser, senior portfolio manager at Union Investment, which holds 80.6 million euros worth of RWE shares.

“RWE would also win a partner to finance future growth projects,” he added.

These could include energy saving products such as smart control products, which enable clients to switch on heating and lights via their phones.

This business area, in which it competes with potent and cash-rich rivals such as Deutsche Telekom and Google , not only requires large investments but also patience, both of which are scarce at RWE.

About 24 per cent of RWE is owned by powerful but financially constrained municipal shareholders, whose main interest is to keep jobs, get a stable dividend and maintain influence over RWE’s supervisory board, where they hold four of the 20 seats.

While open to new investors, a capital increase would be “very problematic”, said Ernst Gerlach, head of VkA, which represents RWE’s municipal shareholders.

RWE said nothing could be ruled out in terms of potential outcomes of the current talks and some investor groups have welcomed the prospect of a new shareholder pushing out the municipalities, hoping this might pave the way for a broader restructuring.

“That’d be a good story,” said Marc Tuengler of retail investor association DSW.

“Shareholders thirst for new ideas.”