Wednesday, May 27, 2015

Seeking Alpha: Can Inefficient Markets Work To E.ON's Advantage?

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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