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Germany: Taking the Lead in Electricity and Gas

Fortnightly Magazine - January 15 2000

department stores also have taken to selling electricity across the counter, with the Karstadt/Hertie chain selling RWE's Avanza brand in its stores in Berlin and Hamburg. The international trade press recently reported that the Promarkt electric goods chain of stores also had entered the electricity sales market. Promarkt initially offered a color television set for just 1 DM to customers signing its two-year supply contracts. The offer, however, was ruled illegal by a regional German court, as German law apparently prohibits the offering of free gifts as inducements to buy products or services.

Shakeout: Major and Minor Mergers

The first merger announcement following enactment of the new German law was the combination of VEBA and VIAG, which created, for a moment, the largest energy company in Germany. This new corporate giant, combining Germany's second- and third-largest energy groups, became the second-largest industrial combination in Germany after DaimlerChrysler. The new VEBA-VIAG company would have annual sales of DM 146 billion and 230,000 employees. Its sales of 180 billion kWh would eclipse those of the RWE, which has annual sales of 136 billion kWh. The merging companies also have interests in two other "core" businesses: the telecommunications and chemical industries. In a move signaling a concentration on its "core" businesses, VIAG announced on Oct. 26 the sale of its international glass company, Gerresheimer Glas. Speculation followed that VEBA may sell its silicon wafers business and the combined entity may dispose of other non-core assets as well.

Nevertheless, the new VEBA/VIAG never gained the No. 1 slot. Following closely on the heals of the VIAG-VEBA announcement was news that the former No. 1 utility, RWE, would merge with No. 4 VEW. Seeking to retain its No. 1 position into the future as a "multi-energy, multi-utility," RWE concurrently announced intentions to accelerate cost-cutting and grow from its current 2.3 percent of the European energy market to 10 percent during the next decade. RWE seems unworried that the announcement of its bold intentions may increase the price of future acquisitions.

Outlook: Will the EU Follow

Germany's Lead?

Given the large number of utilities in Germany and the need to lower costs internally and increase efficiency, more mergers seem inevitable. One might expect that utilities from other countries also will join the merger activity in Germany as the large German utilities look for more opportunities beyond their borders. German utilities already have made minority investments in the Czech and Hungarian electric and gas sectors. In the Czech case, RWE Energie and Bayernwerke recently increased their minority holdings in the shares of Czech companies by acquiring shares owned by Czech municipalities. These strategic investors are awaiting anticipated Czech government decisions concerning additional privatization and industry restructuring.

Well-funded U.S. companies such as Duke Energy also are looking at the purchase of electric generation assets in Germany's neighboring Poland and Czech Republic with which to compete in the German electric supply market. U.S. power marketer Enron has announced plans to become a major trading partner in the German market within the next few years, in spite the fractured nature of the