Implications of State Ownership for Valuation and Sales Processes: a Case Study of DONG Energy

Abstract

The share issue of DONG Energy to New Energy Investment, ATP and PFA attracted substantial attention due to the value of the transaction and the related sales process. From theory and evidence in the academic literature, we examine and apply our own framework in order to value the transaction focusing on specific risk elements associated to state ownership including political risk and liquidity risk. Further, we analyze the sales process conducted by the Danish state based on material from the Ministry of Finance as well as interviews with people familiar to the process. We find that the fundamental transaction value of DONG Energy corresponded to DKK 132.3 per share exceeding the observed transaction value of DKK 107.25 per share by 23% (i.e. a 19% discount). In addition, we conclude that the political risk and liquidity risk had a considerable effect on the value of DONG Energy amounting to a discount of 21.5%. Though this amounts to a substantial discount, control and exit mechanisms present in the transaction have lowered the impact of the risk factors. Moreover, our results indicate that the put option issued by the Danish state to the investors constituted a significant value of DKK 33.7 per share valuing DONG Energy at DKK 73.55 per share, a discount of 37% compared to our estimated fundamental value (DKK 117.3 per share). Our findings suggest that the Danish state conducted a professional process in line with industry standards, but faced several challenges including governance issues that may have resulted in conflict of interest.