Dong Energy’s debut sparks outrage in Denmark over Goldman windfall

Goldman’s investment in utility group under renewed focus

Any time something controversial happens in Denmark, headline writers like to dust off the old classic from Hamlet: “Something is rotten in the state of Denmark”.

It is something they have done a lot recently amid renewed focus on Goldman Sachs’ investment in Denmark’s largest utility. Dong Energy will, barring a last-minute catastrophe, become the largest stock market listing so far this year on Thursday in a move that is set to more than double Goldman’s investment after just over two years.

That healthy return has stoked massive anger in the country, where public opinion has been set against the investment from the start and where the controversy almost led to the collapse of the former government.

“It is a catastrophe . . . It is a huge, huge historic mistake,” Poul Nyrup Rasmussen, a former Danish prime minister, said last week.

A cartoon in Danish newspaper Politiken showed the finance minister at the time of the Goldman deal pointing to a group of robbers and saying: “Let me present the new board of Dong”.

To appreciate the outrage, and also get a sense that if anybody deserves heat it is the Danish government and not Goldman, it is worth going back several years.

In 2012, Dong had something of a year to forget. Its operating profits fell by more than a third after various problems with its gas assets while its credit rating was cut.

The utility cut costs and sold off assets but realised if it wanted to keep investing in its fledgling offshore wind power business it would need fresh capital. The Danish government eventually agreed to the plans but refused to inject new equity itself.

This is the genesis of the controversy. Denmark started a sales process and Goldman and two Danish pension funds put in what appears to be the only serious offer in 2013. Critics claimed later that PensionDanmark, a labour market pension fund, had bid more but government officials insist it was in essence offering a loan, not fresh equity.

Fuel was poured on the fire when some of the Goldman deal’s terms were revealed. The investment bank bought a 19 per cent stake using its private equity and infrastructure arm. Goldman also received put options allowing it to sell back its shares to the government in mid-2018 if Dong did not pursue a stock market listing by then. The bank also received veto rights over big investment decisions and strategy changes.

Such terms made eminent sense for Goldman. Dong had tried and failed to list three times between 2006 and 2008 after a mix of bad luck, political issues and market turbulence. The Danish government remained the controlling shareholder with a 59 per cent stake and it refused to commit definitely to a listing. Furthermore, investing in a European utility in 2013 was far from a straightforward investment. For instance, RWE, the German utility, has lost 50 per cent in its value in the past three years.

Goldman’s financial bonanza — Dong is expected to be worth DKr92bn-DKr107bn ($14bn-$16bn) when it lists on Thursday — is entirely down to the remarkable transformation of the utility. It has used the capital from Goldman to become the clear global leader in developing and operating offshore wind farms as it won a series of projects in the UK and elsewhere.

Dong has managed this reinvention at a time when plenty of other utilities, including Statkraft and Vattenfall in neighbouring Norway and Sweden, have tried something similar with less success.

It may be that tough times in 2012 forced Dong to confront the harsh reality now hitting European utilities earlier than rivals. Goldman is happy enough with its investment that it is hanging on to at least three-quarters of its stake.

Still, there are questions to be answered over the deal — by the Danish government. Why did it decide not to inject fresh equity and instead tell the utility to seek private capital elsewhere? “We can’t blame anybody else than the government that it went so badly,” Mr Rasmussen said.

Government officials somewhat sheepishly say that Denmark could not afford to invest more in a private company after propping up the perennially lossmaking airline SAS. They also note the deal came shortly after the financial crisis forced unpopular taxpayer rescues of many banks. So Dong’s IPO serves not just as an example of how a company can change itself under pressure but also the perils of state ownership.