RWE Working on Plan to Exit Lignite Earlier, Morgan Stanley Says

(Bloomberg) -- RWE AG is intensifying efforts to ditch its lignite operations sooner than expected, according to a note from Morgan Stanley analysts after speaking with company executives on a trip to the US. 

The German utility already agreed to close its coal-fired power stations by 2030 but is seeking input from investors on how to offload those assets sooner and boost shareholder value, according to the bank’s note to clients seen by Bloomberg News. RWE, which hosted its general annual meeting on Thursday, held roadshows for investors in London and the US in recent weeks. 

“We thought they were so much more active and transparent about lignite foundation exit than ever before, including the potential financial parameters,” Morgan Stanley analyst Robert Pulleyn said in the note. “It seems they are actively canvassing market view on ‘what cost’ to pay to get rid.”

RWE was considering spinning off its lignite assets and liabilities into a separate entity, a proposal that was voted down by shareholders last year. The door is still open for operations to be handed over to a government-led firm. The strategy of hiving off the dirty assets and the burden of cleaning up open-cast mines after they shut was identified by activist investors as a way to boost the valuation of the remaining company shares.

A spokeswoman for Morgan Stanley declined to comment on the note to clients. RWE said there had been “no new status on this since last year” in a statement. 

“RWE is ready to talk to the government as soon as they are ready for dialogue,” chief executive officer Markus Krebber said at the company AGM on Thursday when asked about the possibility of offloading the lignite assets. 

RWE chief financial officer, Michael Müller, was canvassing investor views at a meeting in Boston, according to Pulleyn’s note. In a previous note from late March, the analyst said splitting off the dirty lignite assets would be a “significant bull catalyst” for RWE that may propel shares to around 70 euros from currently around 42 euros.

Activist investor Enkraft last year argued that the separation of the lignite business would accelerate the implementation of the utility’s sustainable strategy and boost its valuation by as much as 16.5 billion euros ($16.8 billion).

“A large number of investors don’t want to touch anything to do with thermal coal, which leaves RWE trading at a large valuation discount to pureplay renewables companies,” said Andrew Dick, portfolio manager at Oceanwood Capital Management LLP, an investor in RWE. “ By separating the lignite business, you could get a big upgrade in the valuation over a very short period.”

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