E.On’s acquisition of Ruhrgas – a study of competition issues and
regulatory concessions
© Utility Consultants Ltd 2003
Prepared by Utility Consultants Ltd
www.utilityconsultants.co.nz
Disclaimer
This research report is of a generalnature, and is not intended as specific
professional advice. Accordingly, neitherUtility Consultants, nor its’ directors andshareholders, shall be liable for any lossor damage arising from action or inaction
based on this research report.
Contents
Disclaimer
Contents
Introduction
Overviewof the deal
Acquiringthe stakes
Approvalprocess
Objections
Regulatoryconcessions
Acknowledgments
Feedback
Contact us
Introduction
E.On’s recent acquisitionof Ruhrgas AG for a finalprice of €10.2b marked anew era in global energy
acquisitions
This stands apart asone of the biggest deals
yet, and is likely to heralda new era of investments
characterised by theirsize
This report analysesthe regulatory approvalprocess, the objections
and the concessions thatwere extracted from E.On
Overview ofthe deal
Issues to bediscussed
E.On’sstrategy
Overviewof Ruhrgas
Overviewof E.On
Ruhrgas’ fitwith E.On’s
strategy
The fit withGermany’s
energy policy
Overviewof E.On
Annual electricitysales of about318,000 GWh
Third largestutility in Europe
Formed from themerger of VEBAand VIAG in 1999
Revenueabout €80b
for 2001 year
EBITDAabout €8.6b
for 2001 year
Overviewof E.On
Cash reservesthought to beabout €30b
Energy & oilrepresents about57% of revenue
Recentlydivested Degussa
(chemicals)
Already has manyacquisitions inEurope and UK
Listed on theFrankfurt & NY
stock exchanges
Overviewof Ruhrgas
Has about a60% share of theGerman market
Annualrevenue€11.8b
Primarily awholesaler selling
50b m3 per year
Assets include11,000 km of
pipelines
35% of gas comesfrom Russia, 25%
from Norway
Overviewof Ruhrgas
Expects toinvest €1b in new
gas pipelines
Expects toincrease thisstake to 8%
Owns about6% of Gazprom(at March 2003)
Subsidiary VNGhas a 70% share of
east German market
Shift to gas asprimary fuel will
drive growth
E.On’sstrategy
Dispose ofnon-utility
businesses
Strengthen positionthrough accretive
acquisitions
Focus oncore energy
business
Emphasison continualcost-cutting
Continuedre-structuring tomaintain focusand alignment
Ruhrgas’fit with E.On’s
strategy
Many synergiesfrom parallel value
chains
Increasing shift togas will provideincreased sales
Solid fit with coreenergy business
Stake in Gazpromfits well with E.On’s
push eastwards
Acquired marketshave high revenue
densities
Fit withGermany’s
energy policy
Need for futureinfrastructure
investment
Need to secureGermany’s gas
imports
Acquiringthe stakes
E.On’s Initial 38.5% stakein Ruhrgas was acquiredfrom several companiesincluding Vodafone and
Gelsenberg
E.On acquired afurther 40% stake fromShell, Exxon-Mobil and
Preussag
Final 20% stake wasacquired from RAG
coincident with the saleof Degussa to RAG
Approvalprocess
Key stages inthe approval
Initial applicationto Federal Cartel
Office
Appeal to theEconomics
Ministry
Court injunction(followed by out ofcourt settlements)
Initial application to the Federal Cartel Officefor approval to acquire 100% of Ruhrgas AG
Rejection of this application on the basisthat E.On would increase its already dominant
position in the German gas marketJan 02
E.On appeals this rejection to the EconomicsMinistry, seeking an exemption on the basisthat the benefits to the German economy out
weight the loss of competition
Economics Ministry over-turns the FederalCartel Offices’ initial rejection
Jul 02
Several objectors to the proposed deal weresuccessful in obtaining an injunction from the
Düsseldorf court on the basis of proceduralerrors in the Economics Ministry’s over
turning of the Cartel Offices’ initial rejection
Economics Ministry conducts a secondinvestigation that corrected the alleged
procedural errors and confirmed its’ previousover-turning of the Cartel Offices’ rejection,
but with additional concessions
Sep 02
Aug 02
Düsseldorf court maintained its injunctionuntil its’ final decision was expected in late
January 2003 (later confirmed as 31st)Dec 02
Court decision waswidely expected to uphold previous rulings
blocking the EconomicsMinistry’s clearance
on the basis of marketdominance rather than
procedural error
E.On begins negotiations with the 9plaintiffs to obtain out-of-court agreement
on suitable concessions
Plaintiffs withdraw objections beforeDüsseldorf court case begins as suitable
out of court agreements are reached
Jan 03
Key risk of the court casewas that it could be
referred to the EU who wouldbe in a difficult situation ofneeding to appear to not
simply be following a lowercourt, but also to not totally
ignore the findings of a lowercourt. Referral to the EUcould also have allowed
OFGEM to object
E.On also had the option ofappealing the Düsseldorf
court’s ruling to the GermanSupreme Court, but this could
have delayed proceedingsuntil the end of 2004
Further issue that RAG’s€38 per share bid for
Degussa would lapse on31/1/3 unless the court ruled
in E.On’s favor on theRuhrgas acquisition
Objections
9 objectors
EnBW
Trianel
StadtwerkeRosenheim
StadtwerkeAachen
GGEW
Fortum
Ampere
ConcordPower
Ares Energie
Had the Düsseldorf courtcase proceeded and thenbeen referred to the EU,
OFGEM may also have beenable to object on the basis ofreduced competition of gas
supply to the UK
Company Basis of objection to Ruhrgas acquisition
AmpereConcerned that a reduced number of suppliers could adversely effect their broking activities.
Ares EnergieConcern that an enlarged E.On would make it difficult for Ares Energie to grow its share of the German market.
Concord PowerCould result in unfavorable gas supply conditions to a planned power station in Lubmin (in the north-east).
EnBWPossible concerns that in a vertically integrated E.On, the Ruhrgas component would favor E.On to EnBW’s detriment. May also have been concerned about a reduction in the number of wholesalers.
FortumConcern that an enlarged E.On would make it difficult for Fortum to grow its share of the German market.
GGEWPossible concerns that in a vertically integrated E.On, the Ruhrgas component would favor E.On to GGEW’s detriment. May also have been concerned about a reduction in the number of wholesalers.
Stadtwerke AachenPossible concerns that in a vertically integrated E.On, the Ruhrgas component would favor E.On to Stadtwerke’s detriment. May also have been concerned about a reduction in the number of wholesalers.
Stadtwerke RosenheimPossible concerns that in a vertically integrated E.On, the Ruhrgas component would favor E.On to Stadtwerke’s detriment. May also have been concerned about a reduction in the number of wholesalers.
TrianelConcerned that a reduced number of suppliers could adversely effect their broking activities.
Regulatoryconcessions
Key classes ofconcessions
Divestbusinesses
Auction gasallocations
Grant favorablesupply conditionsto divested firms
Commit toinvestment
program
Economics Ministry viewed this as essential, but it was not included in
the final concessions
Divestbusinesses
Stake inBayerngas
Stake inStadtwerke
Bremen
(Ruhrgas)Stake in VNG
Stake in EWE(Oldenberg)
Stake inGelsenwasser
Stake inThuega
Many of the plaintiffs wanted this concession included but
in the end it was excluded
An additional criteriaimposed was that the
divested businesses mustbe sold to viable entities to
ensure that they providereal competition to E.On
Auction gasallocations
Auctions to be inOctober 2003, 2004
2005 and 2006
Auction 200bkWh of gas tocompetitors
Two auctionsto occur at the
Emden/Bunde hub
Two auctionsto occur at theWaidhaus hub
Grant favorablesupply conditions
Companies that buy more than 50%of their gas from E.On or Ruhrgas havethe right to re-negotiate their contracts,
including reducing their contractedconsumption by up to 20%
Acknowledgements
Utility Consultants Ltdacknowledges the helpof the following peoplein compiling this report
Gill Griffith-Jones,Reuters
A kind lady whowished to stay
anonymous
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