Market efficiency is a controversial topic in the best of times.
Quite a few veteran investors who've lived through a bubble or two laugh
at the idea of market efficiency in equity prices, but other markets
are little better. Extensive government involvement (or interference,
depending upon your point of view) has likewise created numerous
inefficiencies throughout the European electricity markets, as changing
government regulations and commodity volatility has whipsawed power
prices and generation profitability.
Compounding matters for E.ON (OTCQX:EONGY),
Germany's largest power company, has been a long run of poor management
decisions that included ill-fated expansions into markets like Brazil
and Turkey and an asset collection philosophy that has often looked
patchwork at best.
Now the company seems to be on its way to a new
era. Splitting the company will allow investors to choose between what
should be a more growth-oriented business built around renewables and
distribution and a legacy business that is leveraged to the classic
generation model, commodity assets, and a more benign regulatory
environment. I wouldn't assume that there is no risk that the split goes
off without a hitch, but E.ON does look undervalued as presently
constructed and could offer additional upside if these two companies are
in fact more efficiently valued separately than they are together.
Follow this link to the full article:
Can Inefficient Markets Work To E.ON's Advantage?
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