How Germany's Energy Landscape Was Reshaped Over Coffee and Cake

It was, you could say, the ultimate power lunch–or, more accurately, a power “Kaffee und Kuchen,” a beloved German tradition of coffee, cakes, and conversation. On a sunny Sunday in January, EON SE Chief Executive Johannes Teyssen invited his counterpart at German rival RWE, Rolf Martin Schmitz, to his home near Essen, the former coal-and-steel center where both companies are based.

With the coffee served, Teyssen made a proposal that promises to reshape the German energy industry: EON would take over Innogy–RWE’s retail unit and grid operator–to concentrate exclusively on selling power and gas to end users. In return, RWE would get green energy facilities and become a company that does nothing but generate electricity. The deal would transform a pair of middling players into more-focused companies big enough to compete with foreign rivals.

Johannes Teyssen, left, and Rolf Schmitz on March 13.
Photographer: Jasper Juinen/Bloomberg

The executives, who’ve known each other for more than two decades from when Schmitz worked at EON, walked away from the secret meeting in agreement that the cookies were delicious--and that they’d keep exploring a transaction, aiming to come to a firm agreement by mid-March, when both companies were slated to meet with investors.

They had two months to pull off a deal that involved three public companies and huge asset swaps valued at roughly 60 billion euros ($74 billion) including debt, according to people working on the transaction. In the following weeks, company executives and their advisers would hold dozens of secret meetings at their homes and offices in Essen, Dusseldorf, and Frankfurt to work on what they dubbed Project LiveWire, with RWE called Blue and EON called Elk, to lower the chance of leaks.

This story is based on interviews with more than a half-dozen people involved in the talks, who asked not to be identified discussing the confidential negotiations.

Open Window

Teyssen’s timing for the coffee-and-cake proposal wasn’t a coincidence. The departure of Innogy CEO Peter Terium in December following a profit warning and a stock slump created a window of opportunity. And EON, itself the product of a merger a decade earlier, had agreed to sell its 47 percent stake in conventional utility Uniper SE to Finland’s Fortum Oyj, giving it an injection of cash.

EON wasn’t alone in seeking to buy Innogy, which had been spun off by RWE in 2016. European utilities such as Italy’s Enel SpA and Iberdrola SA of Spain, as well as Australian infrastructure investor Macquarie Group Ltd., were circling, raising the prospect of foreigners controlling one of the country’s biggest renewable energy suppliers. If EON and RWE didn’t bulk up soon, the two CEOs fretted, they too could become targets, leaving much of Germany’s energy supply in the hands of outsiders.

That would be a shocking outcome after years of upheaval dating from Chancellor Angela Merkel’s 2011 announcement of a plan to wean the economy off of nuclear and fossil fuels. Once among the most stable profit contributors in Germany, the two utility giants were forced to take billions of euros in writedowns and break themselves up after German wholesale power prices tumbled amid a glut in subsidized green power. Both parties also knew that a German deal would be much more politically palatable.

Schmitz’s goal was clear: If RWE were to sell its 77 percent stake in Innogy, he didn’t want only cash. He wanted generating facilities to secure RWE’s future as an energy supplier. While Enel and Macquarie made proposals that would also have given him some facilities, nothing compared to what EON could offer.

Buttered Up

Still, during negotiations, RWE kept other bidders in the fray to create a smokescreen for the desired deal–and to ensure EON didn’t think the cookies and conversation had buttered him up so much that he’d accept a lowball offer.

A key breakthrough came at the end of February as EON and RWE executives and their advisers huddled in the Dusseldorf offices of law firm Freshfields Bruckhaus Deringer LP. Over several days, they hashed out a framework that would pave the way for a final agreement by March 12.

RWE and EON had agreed to reach a deal by then or walk away, because that week they and Innogy were all scheduled to report earnings, and no one wanted to face uncomfortable questions from investors and journalists.

Innogy, meanwhile, remained in the dark. Then on the evening of March 10, Bloomberg News broke the story that EON was in advanced talks to acquire Innogy. The story forced the companies to scramble, putting out a confirmation just past midnight. “I found out about it on Saturday evening,” Innogy’s CEO Uwe Tigges would tell reporters on Monday.

In the following days, RWE and EON announced further details of the transaction, which values Innogy at about 22 billion euros. RWE ends up with 16.7 percent of EON as well as renewable energy facilities, minority stakes in two nuclear power plants, Innogy’s gas storage business, and a stake in an Austrian power supplier.

To cap off the months of negotiations and an almost sleepless final two weeks to meet the ambitious deadline, Teyssen invited everyone working on the deal to celebratory drinks in Essen, ending what began as coffee-and-cake with a bubbly toast.

— With assistance by Manuel Baigorri, Brian Parkin, and Anna Shiryaevskaya

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