They also have the financial resources to do so. Analysts at Schroder SalomonSmithBarney in London estimate that RWE can easily raise $17 billion for acquisitions, while e.on can raise twice that. Much of the cash comes from holdings the companies acquired over the past three decades in their attempts to diversify. For example, e.on has holdings in chemicals, real estate, and silicon chips, while RWE has invested in such diverse areas as construction and printing machinery.
Now, though, the companies have realized it's wiser to concentrate on the utility-related businesses they know best. And they're getting help from the German government. Beginning in 2002, a change in German tax law will allow RWE and e.on to sell their holdings without paying capital-gains taxes. That provides a powerful incentive to sell nonutility assets and invest the money elsewhere.
They've already begun to diversify geographically. RWE last year bought London-based Thames Water to become the world's third-largest water company. Meanwhile, e.on bought British power supplier Powergen. Both companies are eyeing the U.S. power-generation market.
Investors see risk, however. They worry that the German companies, which have little experience abroad, could pay too much for acquisitions and have trouble operating outside their home market. What do the companies say? RWE Chief Financial Officer Klaus Sturany spoke recently with Frankfurt Bureau Chief Jack Ewing about those and other issues. Here are edited excerpts of their conversation.
Q: What is driving RWE's reorganization at the moment?
A: The major driving force is liberalization of the German electricity market as well as market consolidation in Germany. Liberalization has had serious negative effects on prices. So we have to look beyond Germany for growth opportunities.
Q: How quickly will you be selling nonutility businesses, such as part of your stake in [printing-machinery maker] Heidelberger Druckmaschinen?
A: We have sold some noncore businesses and are committed to selling more, but at the time we need the cash. In between, we have room for further debt financing. The last step [is selling] part of the Heidelberg stake, which is just slightly above 50%.Q: What can you tell us about the types of acquisitions you'll be making?
A: We are only making acquisitions in our core businesses: electricity, gas, water, and waste management. The focus will be on Europe and North America. Outside those regions we will be investigating opportunities on a case-by-case basis. On the other hand, the number of targets is limited, so to a certain extent it's opportunistic.
Q: What are the criteria?
A: It has to fit strategically. We have to ask: Is it a growth market? Is the quality of management good? That's important because we don't have so much international experience. Is existing profitability high? We have started to build a track record with VEW, Thames Water, and the downstream joint venture with Shell.
Q: Where do you think growth will come from?
A: For growth opportunity, water is No. 1. In electricity...there are only a few growth markets where companies are available.
Q: Are national regulations an obstacle?
A: In the U.S. we're not able today to acquire regulated gas and electricity companies. But there are opportunities to buy nonregulated companies in [the] generation area. More and more companies are spinning off generation in order to get nonregulated assets. A positive example of our gaining access in the States is through our subsidiary Consol Energy, a gas and mining company. The company is a natural partner for a generation company. The company plans to form a joint venture with Allegheny Energy Inc. to construct and operate an 88 megawatt gas-generating power plant.
Q: What about emerging markets?
A: Only on a case-by-case basis. You have to be aware of the opportunities and quality of the target.
Q: Until recently RWE has been very focused on the German market. What makes you think you can compete abroad?
A: We have the toughest market in Europe because of deregulation and the openness of the market. We have had to cut costs and are going to save about [$2.2 billion] by 2004, mainly in generation. This kind of experience helps us to be better than others who have not been hit as hard.
Q: Is there a danger of cultural clashes such as we've seen with other cross-border mergers?
A: I am very aware of that. I think we have done a good job with Thames Water, the British-based international water company we acquired last autumn. Today, Thames Water has full management control of all our existing water business. We also have the first international member of our supervisory board, Karel Van Miert, former European Union regulatory commissioner.
Q: In the '70s and '80s, RWE and other German utilities diversified into businesses like chemicals and telecommunications. What about now?
A: We're not going to diversify beyond our core businesses, where we have a very focused multi-utility strategy, and where we have our core competencies.
Q: How much are you affected by the world economic slowdown?
A: In our core business, we're not so sensitive.