Why EON Could Hold the Key to Biggest U.K. Utility Deal in Years

(Bloomberg) -- Germany’s latest utility deal is muddying the path to create a new U.K. energy supply giant.

Britain’s competition watchdog has less than a month to decide whether an already concentrated utility market can handle even more consolidation. What the regulator will say about ownership of what may become Britain’s second-biggest supplier is pivotal after a complicated $27 billion deal in Germany could shrink Britain’s ‘Big Six’ suppliers to four at a time the market is already under intense scrutiny by lawmakers.

SSE Plc and Innogy SE agreed to merge their U.K. retail businesses four months before the much bigger deal for EON AG to acquire Innogy SE from majority owner RWE AG. The intention is to float the joint U.K. supply business after the deal closes in the fourth quarter at the earliest. Innogy was set to own a 34 percent stake which EON will get as part of the deal.

“What the CMA says about the stake is crucial,” Lakis Athanasiou, an analyst at Agency Partners LLP, said by phone. “Both SSE and EON have said publicly they want the deal to go ahead, but I suspect EON may not want the Innogy-SSE merger to progress” and instead take over the Innogy customers themselves, he said.

While Britain has about 60 suppliers, further consolidation among the largest would be a huge blow to the conservative government, which has been on a mission to increase competition since 2014 following concerns that utilities were using their market power to boost consumer prices.

“There is a real danger that we will see very few energy providers and choice will go again, rather than being increased,” said Albert Owen, a Labour Party lawmaker and a member of the parliament’s Business, Energy and Industrial Strategy Committee. “I don’t think it’s helpful if there’s no competition.”

Read more about SSE and Innogy’s plan here

While the EON stake in Innogy holds the key to the future utility landscape in Britain, it is also creating a conflict of interest, since EON is a competitor of SSE and Npower in the retail market, according to Andreas Gandolfo, an analyst at Bloomberg New Energy Finance.

How it could all pan out:

  • The deal could go forward with EON holding the minority stake or being forced to sell it
  • The SSE-Npower deal may be halted, leaving EON and Npower free to merge. This would result in a 25 percent market share for the new EON, putting it neck-and-neck with Centrica Plc as the largest retailer and leaving SSE to find a new solution for its retail arm
  • EON could join SSE-Npower in the tie-up, boosting the full market share to 37 percent

EON is ruling out a three-way merger, board member Leonhard Birnbaum said in an interview last week. A forced sale wouldn’t be palatable either, while “it may be an option to outplace the stake in an independently managed fiduciary unit in our name,” he said.

Lawmakers are calling on the CMA to guarantee competition for consumers.

“I can’t help but be worried by the implications of this,” said Peter Kyle, a Labour politician and a member of the same parliamentary committee as Owen. “I will be watching it very closely. What I want to know first and foremost is what the implications would be for consumers.”

The CMA is due to publish a decision on its probe into the SSE-Npower merger by April 26. The antitrust watchdog hasn’t started an investigation into the EON-RWE deal but is talking to both companies and looking into the implications for the U.K. The German deal isn’t due to close until next year.

“We don’t see any red flags, let’s put it that way,” Birnbaum said Friday in Essen, Germany. “You can’t be sure but right now we don’t see any.”

SSE and Innogy declined to comment.

The Department for Business, Energy and Industrial Strategy said it’s committed to tackling the cost of energy bills, but declined to address the specific issue of whether The Big Six could become just four.

©2018 Bloomberg L.P.

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