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RWE split over Thames sale

October 30, 2005 
Richard Orange 

TWO years after his exit as leader of RWE, Dietmar Kuhnt is still regarded as a nightmarish bogeyman by many of the German utility giant’s most risk-averse investors. His free and easy way with the contents of RWE’s coffers led to E30bn ($36 billion) worth of acquisitions, leaving the company E25bn in debt and its credit ratings under pressure. Indeed, it has often seemed as if Harry Roels’s main job over the past two years has been undoing what his predecessor did in the previous three.

But if RWE decides to sell off its E16bn Thames Water business, it will amount to a near total abandonment of Kuhnt’s legacy. Sources confirm RWE’s board is genuinely divided on whether the planned flotation of a 30% stake in the company should be the first step to a sale or simply a way of determining fair market value.

If it sells, RWE won’t be the first utility to have concluded that water and energy don’t mix. Scottish Power, another utility whose strategy has seen some embarrassing twists and turns, sold the UK’s Southern Water for £2.1bn in 2002. The synergies extolled by the advocates of the multi-utility simply aren’t there. The engineering, regulation and customer service skills required are too different to allow easy savings. For example, water is billed twice a year in the simplest possible way, whereas power and gas billing requires complex database systems. With hindsight, it is tempting to conclude that Kuhnt and his like simply felt acquisitive and couldn’t find suitable energy targets.

If RWE splits off water, it could put pressure on the remaining companies that combine the two. United Utilities, for example, has doggedly stuck to its belief that it benefits from gathering the water, power, and recently gas, networks of the North-west in a single company. But its less-than-stellar results for power and water in last year’s regulatory price reviews put the claim under question. United Utilities could also spin off or sell its water assets.

Even the idea of the global water giant, which Thames Water chief executive Bill Alexander so tirelessly promoted, bringing Thames Water to the number three slot after France’s Veolia and Suez, is now heavily questioned. For one, water privatization hasn’t been a global phenomenon in the way many hoped, curtailing water companies’ growth opportunities.

Investors welcomed the plan to partially float Thames. Merrill Lynch argues that offering a 30% stake, as well as raising some E3bn, would also help remove the discount RWE suffers next to Europe’s power stocks. Thames represents 40% of RWE’s asset base and just 25% of profits.

A full sale would have a more dramatic impact. There would certainly be no shortage of buyers. Regulated assets such as water have never seemed more desirable and the likes of Macquarie Bank would snap the company up.

RWE would find itself more or less debt free. In a perfect position, in fact, to make a big acquisition. It has already been linked to Centrica. Perversely, though, that is exactly what makes a sale less likely. Those same risk-averse investors might feel that, even under Roels’s more enlightened management, they still don’t trust RWE to spend that kind of money.