On Wednesday, the Danish State represented by the Ministry of Finance and DONG Energy A/S - one of the leading energy groups in Northern Europe, announced an agreement with The Goldman Sachs Group, Inc. (GS - Analyst Report) and two Danish pension funds. Under the agreement, funds managed by the Merchant Banking Division of Goldman and the two pension funds – Arbejdsmarkedets Tillægspension (ATP) and PFA Pension Forsikringsaktieselskab (PFA) will subscribe for new shares worth DKK 11 billion (around $2 billion) in DONG Energy.
DONG, one of the leading European utility companies succumbed to high debt, feeble demand for power and the low profitability of gas-fired power plants. Therefore, the capital infusion by Goldman and the Danish funds will strengthen DONG Energy’s balance sheet.
Notably, in Feb 2013, DONG planned to divest DKK 10 billion ($1.8 billion) of non-core assets in 2013-14, reduce costs by DKK 1.2 billion and issue shares worth DKK 6 to 8 billion. Therefore, since the announcement, DONG has vended assets over DKK 8 billion and announced approximately 1,000 layoffs.
Terms of the Agreement
Goldman will purchase new shares worth DKK 8 billion and acquire 19% stake, while ATP will subscribe for DKK 2.2 billion and PFA for DKK 0.8 billion. Each of the two pension funds will hold 5% and 2% stake, respectively.
News shares will be subscribed on the basis of the valuation of DONG Energy of DKK 31.5 billion prior to the capital increase. Notably, after the deal is completed, the Danish state's ownership would be reduced from around 81% to about 60%.
Moreover, the aggregate ownership interest of the existing minority shareholders will be lowered from about 19% to 14%. Further, the existing minority shareholders will be offered to take part in the capital increase on equal terms with the new investors.
As per the terms of the agreement, Goldman and the two pension funds will seek an initial public offering (IPO) of DONG Energy when the conditions are right, with the clause of completing it, following the release of results for financial year 2017. If the stock flotation is not complete by that time, new investors will be given the option to vend their shares to the Danish State on pre-agreed terms.
Benefits of the Agreement
With the new capital infusion, DONG Energy is poised to capitalize on its growth potential and fully execute its financial action plan. The firm plans to invest significantly in offshore wind turbines and exploration and production of oil and gas, once the deal is closed.
On the other side, impressed by the prudent management and ambitious goals of DONG Energy, Goldman and the two funds investing in the firm will help the Danish State pursue growth opportunities and supply environmentally friendly energy and infrastructure to the European markets. Moreover, Goldman, ATP and PFA believe attractive growth prospects and a strong market position of DONG Energy will provide their customers with solid long-term returns.
Fundamentally, we expect Goldman to benefit from its well managed global franchise, strong capital base and industry leading position in trading and asset management. Goldman’s prudent business model and strong fundamentals are expected to deliver better earnings in the upcoming quarters. Currently, Goldman carries a Zacks Rank #3 (Hold).
Some major investment brokers that are worth considering include GAIN Capital Holdings, Inc. (GCAP - Snapshot Report) with a Zacks Rank #1 (Strong Buy). The Charles Schwab Corporation (SCHW - Analyst Report) and E*TRADE Financial Corporation (ETFC - Analyst Report) carry a Zacks Rank #2 (Buy).