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Danish wind giants head for merger -- Vestas and NEG Micon going for global supremacy

Gambling on securing at least 35% of the world wind market next year, Vestas and NEG Micon -- respectively the largest and second largest manufacturers of wind turbines in terms of total sales -- have announced their intention to merge. First, however, they must secure the agreement of the 75,000 shareholders in the two companies. Legally, Vestas is buying shares in NEG Micon. It was a purchase offer which in the hours following the announcement rewarded NEG Micon investors with a 40% boost in share value. Vestas' shares rose 5-6%. A week later the shares of both companies had slightly fallen.

The deal is conditional on two-thirds of shareholders in NEG Micon accepting Vestas' offer. The merger announcement stressed that the agreement would increase the value of NEG Micon shares by 36% compared to that day's stock market value. If the merger goes ahead, former NEG Micon shareholders will own 20% of the new company, with the remaining 80% in the hands of Vestas' shareholders. The share offer closes on January 21.

Vestas Wind Systems A/S will be the name of the merged company. Vestas' managing director, Svend Sigaard, retains his post while NEG Micon's boss, Torben Bjerre-Madsen, becomes vice director under Sigaard. The company headquarters will be at NEG Micon's address in Randers, a provincial town in the centre of Denmark.

Aside from a market share of 35%, the new bosses are targeting savings of DKK 500 million (EUR 67 million) a year, to be achieved in purchases, sales, service, product development, reduction of overlapping sales functions and better exploitation of production facilities. Up to 50% of the savings are targeted to come from better deals with suppliers of raw materials and components after the two former competitors compared product price sheets.

Staff cuts are not named among the synergy effects, but Bjerre-Madsen confirms that layoffs will be made. He says he is convinced they will only be temporary. Indeed, the two companies stress that the merger is expected to result in the creation of "significant value for shareholders." They are projecting revenues this year of EUR 2.7-2.8 billion and profit of 5%, or EUR 67 million after costs for integration and reconstruction.

Defence

The merger protects Vestas and NEG Micon against being taken over by an overseas company -- a real threat as their share prices have fallen and both companies have become cheaper and cheaper. Vestas is also defending itself against the purchase of NEG Micon by a competitor to create a mega rival on its doorstep. Spain's Gamesa, a former partner of Vestas, recently set up an office in Denmark (Windpower Monthly, December 2003).

Publicly traded Schouw & Co, a Danish company of diverse interests with a majority 25% ownership stake in NEG Micon, has not only given a "binding and irrevocable" undertaking to accept Vestas' offer, it has also accepted that it cannot withdraw that undertaking -- not even "in the event that a competing bid is submitted for the shares in NEG Micon." The price for eliciting that promise has apparently been to lift Schouw & Co's obligation to inject DKK 250 million (EUR 33.6 million) into a planned capital increase for NEG Micon.

After the merger, the largest shareholder will be Denmark's ATP pension fund, with an 8.8% stake, followed by Franklin Resources, a Californian investment company, with 8%. A second Danish pension fund, Lønmodtagerens Dyrtidsfond, will own 6.1% and Schouw & Co 5.1%. The remaining 72% of shares in the new Vestas will be owned by 75,000 smaller investors, many of them among the 8500 employees in the company.

The risks

The merger plans -- which if successful will provide Denmark with its second largest industrial company -- were met with less enthusiasm in western Denmark, home to Vestas, than in Randers. Not only is Vestas moving its headquarters from an economically less well off area (and paying an inflated price for NEG Micon's shares), it is also breaking with the company's fundamental policy of growing organically rather than through acquisitions. It was this break with tradition that particularly surprised Johannes Poulsen, who until two years ago had led the company since the mid-1980s. In a rare comment to the press he said: "It was something I had never imagined would happen."

Others have pointed out that a market share of "at least 35%" is tougher to defend than the smaller shares of the two individual companies -- something Sigaard has also maintained (Windpower Monthly, January 2003). For this reason, the boss of what now becomes Denmark's second largest wind turbine maker, the far smaller and privately owned Bonus, sends his best wishes for a successful outcome. Palle Nørgaard notes that he now has one competitor less -- and that many customers will welcome an alternative supplier to the industry giants. He has no fears that Bonus is too small to compete. Two years ago, it supplied turbines to the King Mountain in Texas, one of the largest shore-based wind projects yet, and last year to the 165 MW Nysted offshore plant in Denmark. And while Bonus cannot boast the biggest turnover, it has the healthiest finances.

Nørgaard's view of the difficulty of defending market share wins support from other industry analysts. They warn that Vestas could lose more than it has gained in the merger if competitors in the future learn to take advantage of its weaker negotiating position on some markets.

Money matters

Another big risk, as put by Peter Sørensen of Danish Share Analysis to newspaper Berlingske Tidende, is in merging "two economically sick companies." He finds it "beyond comprehension that shareholders in by far the poorest performing of the two companies are rewarded with as much as 36%. It doesn't make sense. NEG Micon is in such crisis that we're talking about a rescue," he says in an article entitled, "Wind turbine giant on fragile legs."

In a timeline of events, the newspaper reveals that the merger idea was first aired by Sigaard to Bjerre-Madsen well over a year ago, although NEG Micon only "surrendered" to Vestas after the weaker link issued a profit warning in early November. Sørensen shares the views of other analysts that the new firm's plan to raise DKK 2 billion (EUR 270 million) more capital on the stock market will not be easy.

On the contrary, there is risk of a limited cut-price sale of Vestas' shares once employees who took advantage of a share option five years ago -- and have since watched their share value soar and plummet -- become free to sell their certificates from January 1.

The goals

The merger takes NEG Micon's immediate need for capital away. In November it said it would be seeking a capital increase of EUR 135 million. The fingerprints of the involved banks in the merger can be seen in the decision to give up that plan and instead ask investors to provide double that sum for the merged company. A good deal of the new capital will be used to pay off debt.

The capital increase, like the merger, is motivated by a series of benefits. Whether a whole new global strategy for Vestas is among them is not yet known. Unlike Vestas, which has strictly remained a pure turbine supplier, NEG Micon has a history of not only making turbines, but developing projects in several countries, including offshore plant in Britain. One of its most active markets as a developer has been Spain. Here it has installed 650 MW, runs two turbine production facilities, and has another 650 MW projects in planning and stakes in further plans amounting to 1100 MW. Bjerre-Madsen has even said that Vestas' failure to secure a foothold in Spain after its split from former Spanish partner Gamesa two years ago is because it was not prepared to be a wind farm developer (Windpower Monthly, July 2003).

"It's one of the many areas where we haven't yet made a decision and which we'll discuss in the near future. In an instant assessment, though, there will be a form of project development in Spain and elsewhere," is the official combined answer from Sigaard and Bjerre-Madsen.

Further stated aims of the fusion are to: combine two leading companies on the global wind market; exploit the comparative strength of each company in specific geographic markets; make the company stronger to increase potential earnings inherent in large projects on and offshore; exploit "best-in-class" technology, design and production processes for the common good of the company; improve the potential for reaching strategic goals; better exploit existing production facilities around the world; increase the proportion of in-house production of components; combine know-how and reduce dependence on suppliers; and last but presumably not least, to improve profit to 10% of turnover.

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