Could RWE Be A Takeover Target?
RWE has confirmed talks with Gulf investors. RWE needs funding for growth and is looking for a new geographical growth region. It trades on low multiples. A full take-over is unlikely, but a deal could underpin valuation. RWE ( OTCPK:RWEOY ) has confirmed that it is in talks with Arab investors on cooperation. The company has said it is looking at several potential routes of cooperation and would not rule out anything. Gulf investors could take a minority stake, possibly 10%. Dubai’s Sheik Mansur bin Zayed Al Nahyan is being mentioned. A stake at those levels would amount to c. Eur 1.5bn at RWE’s current market capitalization. A full take-over is very unlikely. German municipalities hold about 25% of RWE. That has been a hard stop of any potential deal in the past and will likely remain so. The interest by RWE in cooperation with Gulf investors, including a potential minority investment could be on several levels. Firstly, to acquire a stable shareholder that would not likely take material influence on operational management decisions. There are other big German companies with minority investors from the Gulf region, notably Siemens ( OTCPK:SIEGY ) and Deutsche Bank (NYSE: DB ). RWE could look for a similar deal. The company needs funding for investment in renewables and downstream electricity, its new focus areas. Its capex is now close to maintenance levels, after the most recent reduction that came after company reiterated its focus on cash preservation during its 2014 earnings call ( see my previous article on SA: “Why RWE remains uninspiring” ). The company is barely cash generative in its generation business, which accounts for approximately 36% of total Ebitda. Beyond that, there could be potential growth avenues for RWE in the Gulf. Energy demand growth is amongst the highest globally, and there is keen interest in renewables (aside from new nuclear, but I think it is unlikely that RWE will get involved there). RWE has mentioned it is looking for new geographic growth regions. Masdar, one of the largest global clean energy developers, is owned by Dubai. RWE has announced it is taking a minority stake in solar manufacturer and developer Conergy ( OTC:CEYHF ) recently, in my view a transaction that makes a lot of strategic sense for RWE. It might need funding for growth coming out of that deal. Gulf investors might find that an attractive proposition. RWE is cheap on headline multiples, at a P/E of 11.4x 2015E, vs. a sector average of 16x, EV/Ebitda of 6.6x and a yield of 3.8%. That is another attraction for a potential investor, despite the weak earnings outlook. Sovereign investors tend to look for long term underlying assets. Even though those have below average cash generation prospects, there still of high asset quality which makes them appealing for such a deal. While I only see short term outperformance for RWE from this, there is some positive from the funding impact and potential signal towards valuation underpinning. I have been expect sustained M&A activity in the energy sector going forward. This confirms my view. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.