(Reuters) – Two funds managed by Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) and two Danish pension funds will between them buy 26 percent in Danish state-owned oil and gas group DONG Energy for 11 billion Danish crowns ($2.00 billion) and plan an IPO for the firm, the companies said.
Credit analysts said the investment, via a capital increase, could lead to a review of the negative outlook on DONG’s credit rating. It will allow DONG DOENRY.UL to strengthen its balance sheet, hit by falling electricity demand due to the economic crisis and competition from cheap coal, and pursue its ambition to become a leading player in offshore wind energy.
Already European market leader with 2 gigawatts of offshore wind power installed in Denmark, Britain and Germany, DONG wants to more than triple that to 6.5 gigawatt by 2020, its CEO told Reuters in August.
“Once the agreement is finalized, the company can also in the future invest significantly in offshore wind turbines and exploration and production of oil and gas,” Danish Finance Minister Bjarne Corydon said in a statement on Wednesday.
Goldman Sachs Infrastructure Partners – one of the world’s biggest infrastructure investors with nearly $10 billion under management – will subscribe to new shares worth 8 billion crowns, along with energy-focused private equity fund Broad Street Energy Partners, also managed by Goldman Sachs.Together they will have a stake of about 19 percent.
Danish pension fund Arbejdsmarkedets Tillægspension (ATP) will subscribe 2.2 billion crowns for a 5 percent stake and Pension Forsikringsaktieselskab (PFA) 0.8 billion for a 2 percent stake.
The deal would see the state’s ownership reduced from around 81 percent to about 60 percent.
NEGATIVE RATINGS OUTLOOK
DONG Chief Executive Henrik Poulsen, who took over in August 2012, is refocusing the firm’s investments. He has said that 50 percent of DONG’s future investments will go towards offshore wind and 40 percent to DONG’s traditional business of oil and gas exploration and production in the seas around Denmark.
Announcing 2012 results in February, Poulsen said DONG planned to divest 10 billion Danish crowns ($1.80 billion) of non-core assets in 2013-14, cut costs by 1.2 billion and raise 6 to 8 billion crowns of new equity.
DONG has sold more than 8 billion crowns worth of assets – including Danish, Polish, and Norwegian onshore wind projects – and announced nearly 1,000 job cuts in the past 12 months. It has also issued a 500 million euro hybrid bond, half of which was classified as equity by some ratings agencies.
DONG’s 36 billion crown debt is rated BBB+, three notches above junk, and is on negative outlook with Standard and Poor’s and Fitch. Analysts say the equity increase would have to be finalized before the outlook could be changed, but said it was positive for DONG’s creditworthiness.
Fitch revised DONG’s rating outlook to negative from stable in November 2012 due to a marked deterioration in the firm’s leverage ratio and its tough operating environment.
Its adjusted net debt had grown to about six times Funds From Operations (FFO, or operating cash flow) from three times in 2011. For a stabilization of the outlook, this ration would have to sustain below four times.
“We project that the planned large equity increase, together with good progress on other elements of DONG’s financial action plan, would improve the leverage ratio to about three times,” Fitch senior director Arkadiusz Wicik said.
DONG and its new investors said in a statement they would seek an initial public offering when conditions were right.
But they added that if an IPO has not been completed following the release of financial statements for the 2017 financial year, the new investors would have the option to sell their shares back to the Danish State on pre-agreed terms. It gave no further detail on the sell-back clause.
An IPO would further break open the near-total public control over the utility sector in Scandinavia, where Finland’s Fortum – which is 50.76 percent state-owned – is the only major listed public utility.
Sweden’s finance minister said last week that a listing of Swedish utility Vattenfall VATN.UL was not currently on the agenda, although bankers have told Reuters the firm is starting to prepare the ground for a sale or a stock market flotation of its ailing European business.