RWE acquisition plans in focus after Thames sale:
German utility RWE secured a top price for its water unit Thames Water but investors switched their focus quickly to whether the money would tempt the cash-rich company to make expensive acquisitions in its core power and gas businesses. Shares in RWE were down 0.9 percent at 77.35 euros at 1300 GMT on Tuesday, underperforming a 0.3 percent dip in the pan-European DJ Stoxx utilities index. Late on Monday, RWE announced the sale of Thames Water to a group led by Australian investment bank Macquarie Bank Ltd. for 8 billion pounds ($15 billion) including the assumption of 3.2 billion pounds of net debt. The price came in at the higher end of analysts' expectations of between 7 billion and 8 billion pounds. They expected RWE to book gain of at least 400 million euros. Analysts said the disposal of RWE's water activities solved one problem for RWE -- the tying up of capital in a relatively underperforming asset -- but created another one about what to do with the close to 20 billion euros of cash which it will have after the sale of its water businesses. In addition to the Thames sale, RWE is in the process of selling its American Water unit through a stock market flotation to fully focus on its more profitable electricity and gas businesses, like its rich local rival E.ON. "The key question is -- what next? They certainly look at some assets in Europe. But which asset is not already inflated on takeover speculation?" said Equinet analyst Michael Schaefer. RWE Chief Executive Harry Roels said last month RWE was more likely to use the proceeds of the water business sales to fund medium-sized acquisitions than big deals. "We have said several times that we are not thinking of a big acquisition," an RWE spokeswoman said on Tuesday. "We're considering small and medium-sized acquisitions to round off our portfolio." Analysts think RWE could follow a trend among gas utilities of buying more stakes in gas fields. High gas prices have squeezed utilities' gas sales margins, while owning gas producing assets would provide a hedge, balancing downstream losses with higher upstream profits. However, with Russia more unwilling to cede control of its hydrocarbon resources and a dearth of assets available, analysts said this strategy could prove difficult and expensive. Nevertheless Roels now has the scope to make acquisitions to enlarge Europe's fourth-biggest utility and needs to do so if he doesn't want RWE itself to become a takeover target, they said. Ironically RWE has made itself more attractive after selling its water businesses, because they currently serve as something of a poison pill for potential energy market buyers. "This gives the company a much clearer structure, and also raises its attraction as a potential takeover target," said Matthias Heck, analyst at Sal. Oppenheim. Analysts estimated RWE will have about 2.5 billion euros more cash than debt by the end of the year, making its balance sheet not optimal because firms should have some debt to enhance returns to shareholders. RWE has been the biggest beneficiary of rising power prices in Germany, where it has a 32 percent market share. It is also fast becoming one of eastern Europe's biggest players. Utilities in Europe are on the hunt for assets after several years of restraint. Higher power and gas prices and cost cuts have boosted their cash flows and helped reduce debt on their balance sheets, leading to an improvement in credit ratings. While E.ON has made a 37-billion-euro bid for Spanish utility Endesa, RWE has hitherto stayed away from big deals due to a lack of firepower. Analysts have said that Scottish Power, which has a market value of around $22 billion, might be a good target for the RWE cashpile because such a deal would make strategic sense and could have significant synergies with RWE's UK unit, npower. They also said expanding into the Netherlands, eastern Europe or perhaps Spain might be an easier route, but it would be difficult to find a utility big enough for RWE. Depending on the water business disposals, RWE has said it would raise its dividend payout ratio to between 70-80 percent of earnings for 2006, compared with 44 percent pay-out in 2005. 19.10.06