Guan’s blog


Goldman DONG

28 Jan 2014

Everyone in Denmark is talking about the sale of a stake worth 11 billion kroner* in the government owned energy company DONG to a consortium of a Goldman Sachs controlled luxembourgeois company and two Danish pension funds. This will most likely be approved tomorrow and be moot anyway, but DONG!

My friend Niels-Jakob Harbo Hansen and I calculated some of the financial aspects of the deal, and they don’t look that good. The bidders are offering about 107.25 kroner per share, supposedly valuing the company at 31.5 billion kroner before the investment. In addition to a healthy package of minority rights, they also get a put option for 60% of the shares: if DONG doesn’t go public within 4 years or so (and Goldman can veto that), the investors can sell 60% of their shares at a strike price equal to the purchase price of 107.25 kr per share, plus a healthy return of about 3% per year.

That’s like an insurance policy that covers not only your loss, but also the insurance premium you originally paid, plus interest.

Once you account for the put option, the deal values the shares at 24.5 billion kr., around 47% of book value. Maybe that’s fair because DONG just had a big loss and will be constrained by its business plan to invest in windmills and such, but it still seems awfully low. On the other hand, the investment bankers have deemed it Fair™, so who am I to question that.

The main thing we did was to compare the deal to the most obvious alternative: the Danish government (AAA rating, 26% debt/GDP, 45% including local government) could borrow at an interest rate of about 1%, and make the investment itself. The expected loss from the deal compared to a government investment is about 2.5 billion kroner.

Should a government make equity investments on this scale? By all accounts an investment is necessary right now for DONG to eventually go public. You could question why DONG Energy exists in the first place. The company was formed by the merger of the former state oil company DONG (you can probably guess what the acronym means now) and various electricity companies, probably to prepare for an IPO. They did something similar with the former regional phone companies in 1990, and Danish phone and internet customers have rued that decision ever since.