RWE - Essent takeover: no to economic nationalism

By Benedict De Meulemeester

By Benedict De Meulemeester on 29/05/2009

The province of Noord-Brabant, shareholder of Dutch utility Essent, has approved the takeover of Essent by German energy market giant RWE. The Germans are paying a total 9,3 billion euro to the Dutch provinces and communities that were shareholders of Essent. RWE is acquiring an important market share in the Dutch power and natural gas markets, a range of power production assets and a reputed trading branche.

The deal had been announced months ago. Still, at some point it looked like it would not hold. The Dutch public reacted emotionally to the takeover of one of their top utility firms by a German company. Because of that, the shareholders were hesitant about selling. The fact that Nuon, another large Dutch company has announced that it also plans to be sold to a German company, Vattenfall, has added to the negativity. The two largest Dutch energy suppliers would fall in the hands of foreign owners. Have you ever seen a football game between the national teams of the Netherlands and Germany? You might understand that the fact that the two giant companies that take over Dutch crown jewels are German, is not particularly appreciated in the Netherlands.

To my big surprise, I heard arguments smelling of economic nationalism discussed openly on the Dutch radio. I thought the Netherlands was one of the most liberal countries of Europe? Dutch businessmen pride themselves on doing business across the globe. I once heard at a Dutch business conference the remark: "we are Dutch, we sell the world". Would they add to that, "but we don't want the world to buy us?".

The takeover of Essent was inevitable. What the Dutch public fails to understand, is that its utilities have a structural weakness in the European energy markets of tomorrow. Due to the specific structure of the Dutch gas market, they are limited to being gas traders. And with its over-dependency on gas-fired power plants, they lack the asset diversification that is necessary to become an important player in power production. If you have more than 80% of your power plants fueled by gas, the marginal cost economics is suffocating your profitability. When Dutch power prices ran up to 10o euro per MWh in 2008 (baseload), the gas price had also risen to 40 euro per MWh. If you know that you use 2,5 MWh of gas per MWh of electricity that you produce, you can quickly calculate that even with such high prices, gas-fired power production wasn't exactly a sprakling business. If you imagine that companies such as EdF, Electrabel, RWE, E-On, Vattenfall, etc. could sell the electricity that they produce in nuclear or coal-fired power plants at that same 100 euro per MWh, you understand how much more profitable these production companies are. Dutch utilities have managed to compensate for this lower profitability of their production branches by developing excellent trading activities. It remains a structural weakness however.

However giant they might look to any Dutch consumer who is in contact with a call center to ask for an explanation of his energy bill, the Dutch utilities are medium-sized on a European scale. The Dutch market (15 million inhabitants) is not the size of those of France, Germany or the UK. Moreover, the Dutch market was historically divided among many different suppliers: Essent, Nuon, Eneco, Delta and then a whole range of smaller local utilities, many of which have been taken over by foreign companies such as Electrabel, E-On or RWE. This has been a boon to opening markets in the Netherlands. We can say today that the Dutch gas and power markets are the most open and competitive that you can find in continental Europe. But due to this fragmentation, none of the Dutch energy companies is really big on a European scale. And if you are medium-sized, you basically have two strategic choices:

  1. You specialize and become a niche market supplier,
  2. You team up with other companies to become bigger.

With limited possibilities of niche marketing in energy, it is obvious why Essent and Nuon chose the second option. It will be interesting to see whether Eneco follows this path. In the hands of RWE, Essent has now become part of one of the top three energy suppliers in Europe. From a strictly economical point of view this looks evident.

I understand the sensitivities of the Dutch public. As you can read in my post on the takeover of SPE by EdF, I feel rather uncomfortable with the situation in Belgium where almost all production capacity is now in French hands. There is an essential difference, however. GdF and EdF are both state-held companies, which means that in Belgium, it is the government of a foreign country that holds the power production capacity. Both RWE and Vattenfall are private companies. Moreover, they both have an international orientation. I don't think either company would spoil the functioning of their recently acquired Dutch branches out of nationalist motives. In the next few months, we will see how this takeover process takes shape. Often this turns out to be not so easy.

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