Goldman Sachs buys fifth of DONG

[Angst]

http://www.bloomberg.com/news/2013-...illion-stake-in-denmark-s-dong-energy-1-.html

Disclaimer: I do not speak with concurrent nor accurate political or economical terminology. If I type something wildly inaccurate, it is probably out of necessity as I'm neither an economy nor a political student. Here goes.

Goldman Sachs Group Inc. (GS) will buy an 8 billion-krone ($1.46 billion) stake in Dong Energy A/S, Denmark’s largest utility, which is shoring up its balance sheet after losing money on failed natural gas bets.

The purchase will give New York-based Goldman a 19 percent stake in Dong, which is controlled by the government, the utility said late yesterday. Danish pension funds ATP and PFA will pay 2.2 billion kroner and 800 million kroner to buy stakes of about 5 percent and 2 percent, respectively.

Denmark’s government, which pulled a planned initial public offering of Dong in 2008, said in February it will sell a stake in the Skaerbaek, Denmark-based company as writedowns soared. Dong yesterday said the parties have agreed to seek an initial public offering when conditions “are right.”

The new investors have an option to sell their holdings back to the government should an IPO not be completed before the release of Dong’s 2017 financial report, according to today’s statement.

Goldman plans to “grow the business and provide environmentally friendly energy and infrastructure for European markets,” Andrew Wolff, head of Goldman Sachs Merchant Banking Division in Europe, said in the statement. Goldman is buying the stake via funds managed by Wolff's division.

Dong is the world’s largest operator of offshore wind turbine parks. The company also explores for oil and natural gas in the North Sea.

Yields Fall

The yield on Dong’s 6.25 percent bond due 3013 declined to 6.07 percent in the Danish capital yesterday, the lowest since the bond started trading on June 24. The bond yielded about 6.10 percent on Oct. 1, according to Composite Bloomberg Bond Trader prices.

The sale will reduce the government’s stake to about 60 percent from 81 percent, according to the statement.

Dong is selling shares as part of a financial restructuring announced in February to cut costs, reduce debt and bolster investments in oil and gas exploration as well as wind farms. The plan includes cutting costs by 20 percent and selling assets to raise 10 billion kroner.

“With the injection of new equity, we have almost fully delivered on our financial action plan and have thus secured the necessary platform for pursuing our ambitions for the coming years,” Dong Chief Executive Officer Henrik Poulsen said in the statement.

Dong said in April the company is being advised by Nordea Bank AB (NDA) and Morgan Stanley. (MS)

TLDR; Goldman Sachs saves DONG from a number of fallacious investments and gains a fifth of the shares.

However, many Danes are really not pleased about this. I have a number of sources in Danish with quite angry reflections over the purchase. Danes are not happy with Goldman Sachs' short term practices with little concern with the environment and their tax evasions through eg Cayman Islands or Luxembourg. The critical Danes highlight that some competitors in the purchase - a pensions company for example - made offers on par with Goldman Sachs but without the history of shrewd questionable enterprise. That it was a centrum-left government that ordained the sale further angered a number of ex-politicians and commentators in the Danish media. There is a minor crisis within the party as well as they feel it is unethical to sell out state shares for the purpose of an anti-environmental entity.

Basically, the criticism centers around the fact that DONG is a corporation with long term environmental interests, eg through the production of windmill turbines, something that arch-American short term investments - which Goldman Sachs stands for - does not really care about. Goldman Sachs have replied that they infact do consider this purchase a long-term investment, hinting that they are doing this to further an entry into environmentally sustainable economies.

And of course, the stimulus also included a pretty hefty and disgusting bonus to the 1% of DONG.

What to discuss in this thread? Well, I don't know where to stand. I kinda hope for you to enlighten me about the practices or malpractices of Goldman Sachs, and to convince me that a simple fifth of the shares are not enough to break the environmental practices of DONG. The Danish state still keeps a 61% majority after all. For the discourse here in Denmark is propagandatastic, from both sides.

 

[azzaman333]

hehehe, dong, hehehe

 

[Masada]

goldman sachs always needs more dong.

More seriously, this is going to bite Denmark on the ass. It's one thing to sell-off a state power asset to say a pension fund or even a foreign utilities company. It's quite another thing to sell of a state power asset to the Vampire Squid. There's two options really: Goldman's has somehow come up with a way to bleed DONG of value or it's looking to take the Danish government for a ride somehow. I'd be looking at what assurances or guarantees DONG or the government might have given regard I dunno dividend payments or future privatization &etc. Because straight up ownership of a utility ain't going to be enough to satisfy them.

 

[Tahuti]

Well, owning shares does not really equal control over day to day operations, unless it is a small company (say 50 employees) which DONG obviously isn't. Change of owner is very unlikely is to change the practices of DONG which is managed by the upper echelons of its employees (that 1% who is receiving the bonus) like almost any large corporation is. Unless Goldman Sachs uses divestment threats to force DONG to change practices in a way unfavourable to the Danes, I don't think there will likely be any change.

Mergers can change management of corporations dramatically, as top managers from the merged companies are usually brought to the boards as part of the deal, but that's another story.

 

[Masada]

Yeah, that's more or less true. I don't think the fix is at the management level. But there's got to be some sort of compelling reason for Goldman's to invest in a utility. Chasing an undervalued utility firm just ain't their thing.

 

[really]

What were these failed natural gas bets?

You can't really give out about Goldman Sachs being short termist if the company is in trouble because it didn't hedge those bets or if it was involved in something dodgy.

The cynic in me would suggest GS are investing as they were on the other side of the bet and it is easier for them to take part of the company rather than to try and get the money out of it.

GS already have an exit strategy as the company will either be floated in the next few years or if it isn't they can sell it back to the state.

 

[Kyriakos]

So...i guess you could say...
Goldman-Sachs is the fifth column now.

 

[Angst]

Well, owning shares does not really equal control over day to day operations, unless it is a small company (say 50 employees) which DONG obviously isn't. Change of owner is very unlikely is to change the practices of DONG which is managed by the upper echelons of its employees (that 1% who is receiving the bonus) like almost any large corporation is. Unless Goldman Sachs uses divestment threats to force DONG to change practices in a way unfavourable to the Danes, I don't think there will likely be any change.

Mergers can change management of corporations dramatically, as top managers from the merged companies are usually brought to the boards as part of the deal, but that's another story.

Goldman Sachs is gaining a kind of reserved vetoing power in choosing who the future directors, board members, overlords etc. are going to be. They're gaining a lot of influence in choosing the future direction of the corporation. I don't know the details though and a proper English source would be better than my semiretarded translations of Danish sensationalist journalism.

 

[Farm Boy]

How does this impact Heimerdonger's viability in mid lane?

 

[Yoda Power]

Angst. Basically the state is taking a bet. Perhaps this will be a sucessfull deal and we'll earn lots of money. Perhaps it won't. No one can know for sure. In fact no even really knows what Dong is worth in the first place!

The debate in DK is pretty much filled with people who claim they know more than they do, from both sides.

 

[Angst]

Yeah that's the problem. There's also that purchases like these are often done behind closed doors - public statements from the parties involved have all been "I cannot give you the details exactly due to our agreement" - of course, the secrecy is kind of problematic for the legitimacy of the sale, but even if it isn't, it's damn hard for me to convince myself that this is a good idea if they don't actually make a public statement about the actual consequences of this deal. For there are consequences of such a deal; if you stimulate something with 1.5 billion, you expect something to happen with it, even if all that happens is that the purchaser earns the returns rather than the original owner.

 

[Yoda Power]

I think you're being a bit dramatic there. I think the terms of the deal are pretty well known. The point with the investment by GS (and others) is to give Dong more capital to developed its business. That's not really invidious I think.

edit: Here's what our minister of finance says:

- It's about the conditions under which they inject capital into. And they (Goldman Sachs, ed.) Are willing to take part of the risk, otherwise we as a country should have undertaken. The Dong will make the coming years is to invest very heavily in offshore wind farms. It is a good idea, it is green and create jobs. But it is not without risk, and I am finance minister and representative of the country. And I will try to act so properly, wisely and prudently as possible, in proportion to that we do not lose money by behaving recklessly.

Spoiler in Danish :

- Det handler om, hvilke betingelser de skyder kapital ind på. Og de (Goldman Sachs, red.) er villige til at tage en del af den risiko, vi ellers som land skulle have påtaget os. Det Dong vil gøre de kommende år er at investere meget massivt i havvindmølleparker. Det er en god ide, det er grønt og skaber arbejdspladser. Men det er ikke uden risiko, og jeg er finansminister og repræsenterer hele landet. Og jeg skal forsøge at optræde så ordentligt, klogt og forsigtigt som muligt, i forhold til at vi ikke taber penge ved at opføre os letsindigt.

 

[Angst]

I think you're being a bit dramatic there. I think the terms of the deal are pretty well known. The point with the investment by GS (and others) is to give Dong more capital to developed its business. That's not really invidious I think.

edit: Here's what our minister of finance says:

Spoiler in Danish :

- Det handler om, hvilke betingelser de skyder kapital ind på. Og de (Goldman Sachs, red.) er villige til at tage en del af den risiko, vi ellers som land skulle have påtaget os. Det Dong vil gøre de kommende år er at investere meget massivt i havvindmølleparker. Det er en god ide, det er grønt og skaber arbejdspladser. Men det er ikke uden risiko, og jeg er finansminister og repræsenterer hele landet. Og jeg skal forsøge at optræde så ordentligt, klogt og forsigtigt som muligt, i forhold til at vi ikke taber penge ved at opføre os letsindigt.

So basically Goldman Sachs invests into windmill parks in this deal?

The money has to be directed at something. That was my question. If this is the case, I understand the choice.

 

[Masada]

I don't think windmills - a long term asset with low returns - necessarily fits Goldman's investment profile of "make lots of money now!"

 

[Tahuti]

Does GS possess shares of similar operations?

 

[Masada]

They have a pretty diverse portfolio, so I wouldn't be surprised if they did. But they'd be holding that for reasons other than the modest ROI. GS just has a different sort of approach to investing that's much more aggressive than the acquisition of something an institutional would like.

EDIT: Done so more reading. So here's some facts:

• There seems to be a plan to privatize DONG by 2018.
• DONG's credit is all bbb which is three notches above junk.
• There's a clause in the contract which allows the investors to sell their shares back to the government in 2017 if the float doesn't take place. The terms of the buyback are not public.
• Goldman's also has the right to veto board appointments, new acquisitions, the issue of new shares of the raising of hybrid capital
• Two pension funds are also buying in for a total stake of 7% (5% and 2% respectively).

So what does this mean? Well there's probably 'naff all risk in this for Goldman's if things go south because the terms of the buy-back are going to leave better off. Why? Because otherwise Goldman's would be interested in investing. Arguably, it isn't even investing: all it's doing is lending money to DONG at rates higher than what DONG could borrow money from the government.

So why is the Danish government doing this? Because it wants to bring in Goldman's so it can blame them for all the cost cutting and staff cuts preparatory to a privatization. Goldman's will of course help them decide where to make the cuts and work on getting the ratings agencies on side to reduce borrowing costs for DONG.

I suppose this all makes sense if the current Danish Government believes that the commitment to privatize DONG by 2017 will stick till then. (I suspect it will come hell or high water because of the terms of the buy-back which might be calculated to guarantee just that outcome. Why? Because it was knocked back in 2008... and let's just say that the government departments who drive this kind of thing have long institutional memories).

Is this the wisest thing to do? If the privatization goes off it's not the worst thing. It should at least maximize the government's take from the sale provided Goldman's contract aligns it's interests with the governments. Now if the deal falls through because the next government doesn't want to go through with the sale... it'll be a freaking disaster because Goldman's will walk away with a nice pay-day.

Is this what I would have done? I don't know. DONG seems to have made some bad decisions of late. It built a big gas power station at Severn in the UK in 2010 but sold out of it at the end of last year for a significant loss. It also seems to have built a lot of underpeforming wind assets in the last 7 or so years. But I'm not sure of the specifics: at a guess DONG built them on the basis of economic modelling that assumed a European recovery that hasn't really materialized. But really, I don't know what I would have done. It's a hard one.

But I guess this could be a good thing if it ensures the financial health of the company preparatory to it being sold as a nice lean and well-performing infrastructure asset fit for purchase by Danish pension funds. A little evil now for a lot of good in the future perhaps.

 

[Angst]

Thanks for the post Masada. I'm really not sure how to feel about it. It's very complicated to me.

 

[Yoda Power]

Good analysis Masada, but...

So why is the Danish government doing this? Because it wants to bring in Goldman's so it can blame them for all the cost cutting and staff cuts preparatory to a privatization. Goldman's will of course help them decide where to make the cuts and work on getting the ratings agencies on side to reduce borrowing costs for DONG.

...alternatively because the Danish government can't fund the loan in the current political/fiscal climate?

 

[Masada]

Course it can. Denmark's AAA rated with a stable/steady outlook.

 

[Yoda Power]

Which is why I wrote "political". The voters might not think it's a good idea to pour money into Dong.* My point is that there could be non-economic reasons for doing it.

*Although that might have changed now with the public uproar.