A Desperate Germany AG Passes E.ON Gas Deal

The world blinked and Germany created its very own British Gas. E.ON, a mega-utility, and Germany’s third largest industrial group after Siemens and DaimlerChrysler, is taking over Ruhrgas after a government decision on Friday to overrule the objections of its own Cartel Office.

Until the E.ON takeover, Ruhrgas was like a giant, handcuffed octopus. Ownership was held in a web of holding companies controlled by coal, steel and oil and gas companies. RWE, the main rival to E.ON, held a stake, as did BP, Shell and ExxonMobil. With so many vested interests in control, Ruhrgas could not move upstream, downstream or sideways.

The takeover by E.ON, a process that began when BP sold its shareholding to the German power company, has liberated Ruhrgas. The question is what an octopus with percent of the German market does next.

The Government has been clever: in return for blessing the merger, it has ordered E.ON to ring fence its 11,000 kms of pipeline, creating a German Transco. In addition it must sell some shareholdings and divest five percent of its gas portfolio — the long term take-or-pay contracts — with Russia’s Gazprom and Statoil of Norway.

None of this should bother E.ON. Legally separating the pipes is EU law; and as for the take-or-pay gas, it is a moot point whether the contracts have any present value. Ruhrgas may have overpaid for security of supply.

For E.ON, the opportunity is to move downstream. Ruhrgas is really nothing more than a gas reseller buying wholesale from Russia and selling wholesale to small distributors. Ruhrgas owns seventy percent of Thuga, a holding company with interests in hundreds of Stadtwerke, the municipal gasworks that sell fuel to German homes. Undue influence over this market was the concern of the Cartel Office but the Government has left Thuga intact, leaving E.ON free to build a consumer business.

E.ON could also move upstream. The utility has cash, a resource in desperately short supply at Gazprom, which supplies a quarter of Europe’s gas demand and which might feel more comfortable with a German utility partner than a bullying Shell or BP.

You can hardly criticise the German Government for ignoring the Cartel Office. While E.ON builds its energy empire, the walls of the Reich appear to be crumbling: Fairchild Dornier, the aerospace firm, Kirch, the media group, Philipp Holzmann, the construction firm, and now Babcock Borsig, the plant engineer, lie in ruins. Administrators and receivers are crawling over the foundations of Germany Inc and the bankers are watching as they flick the dust off their suits. It was not always like this. In 1999, Chancellor Schröder persuaded the banks to support a DM4 billion for Holzmann, including DM 250 million in state aid. But second time round he could not rustle up €80 million in new money to keep it going.

Shareholders of the German banks have had enough of soft loans for Deutschland AG and changes in capital gains tax mean the shareholdings that link banks to industry can be sold. Besides, lending to manufacturers for a few basis points of margin is unattractive and becoming more risky.

The bread and butter of companies such as Babcock Borsig is building plant in Germany’s industrial heartland but demand is not buoyant. German unemployment hit a four year high yesterday and DIW, an economics institute, suggested that recovery could stall next year, held back as the new strength of the euro affects demand for German exports.

The trouble with Germany is that it has been unable to find an alternative to those high cost manufacturing jobs. The IFO, a leading German think tank, recently puzzled over why East Germany consistently lagged behind the West in growth per capita. East German engineers were just as qualified and capital was being invested in the East at a faster rate. The reason can be found in a separate piece of IFO research, which proposes removing the wage floor in Germany’s benefit system which, it complains, is a barrier to employment. In short, the Germans have priced themselves out of the job market. With the unemployment rate approaching double-digit percentages, one wonders whether Germany might soon produce its own migrant workers, a sort of reverse Auf wiedersehen, Pet.

To regard that as strange is to forget even recent history.

German emigration played a big role in building North America since Francis Daniel Pastorius, a German Quaker, founded the first German settlement in North America in 1683. Britain helped to finance the transport of more German Protestants to America. and in the 19th century, Germans headed west in such numbers that Milwaukee became known as a German Athens and Germans founded America’s first Socialist party.

Such heritage gives credence to a new Chrysler ad campaign that will remind Americans of the contribution of famous German scientists in building their country.

But DaimlerChrysler may be taking a risk in focusing on more recent immigrants, such as Einstein and the German rocket scientists who arrived after the Second World War. Some may even recall the words of Tom Lehrer’s ditty:

“Once the rockets are up, Who cares where they come down? That’s not my department,’ Says Wernher von Braun.”


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