A $4 Billion Wake-Up Call Flags Political Risk to Orsted Owners

(Bloomberg) -- Investors in Orsted A/S can be forgiven for having overlooked the political risk lurking in the company.

Shareholders in the world’s biggest operator of wind parks have enjoyed high returns since it went public in the middle of 2016. During that time, the Danish state (which owns just above 50 percent of Orsted) has let the company shape its own strategy.

But this week, it became clear how quickly a parliamentary tussle can undermine a key strategy that was supposed to lead to considerable shareholder payouts and more cash for bondholders.

With an election looming, the opposition Social Democrats decided on Sunday to tell the Finance Minister that the party no longer wants Orsted to continue a sales process for what might be almost $4 billion in power distribution assets. As far as investors were concerned, that was a complete shock, given earlier signals from the Danish state. The stock had its worst day in half a year and Orsted’s board and management were clearly caught off guard.

Read more: Orsted Shares Slump Most Since July as Asset Sale Scuppered

The development “is a wake-up call for investors,” Morten Imsgard, an analyst covering Orsted for Sydbank, said by phone.

“The company has been a hot political potato for many years,” he said. “But there had been calm around the political side since the IPO, so I can understand if there are international investors who are very surprised about this interference by the government.’’

Even the finance minister, Kristian Jensen, says it may now be hard to attract international investors to Denmark, given the confusion surrounding Orsted. He went as far as to say the country’s reputation had been damaged.

Orsted, which used to be called Dong Energy A/S, actually has a history of political turmoil. In 2014, a Social Democrat-led coalition split amid disagreement over a decision to let Goldman Sachs buy a stake. In 2007, a center-right government delayed a planned IPO at the 11th hour.

“Orsted is in a situation where the company is subject to the will of the political majority of the Danish parliament,” Mads Dagnis Jensen, an associate professor at the Copenhagen Business School, said by phone.

“It’s possible that the country will get a new Social Democrat-led government later this year,” he said. The party is “in the process of shifting to a new profile that’s more skeptical toward big business and profiteering,’’ and an agreement to sell key infrastructure assets might leave it vulnerable to voter backlash, he said.

Orsted’s management has argued the assets no longer suit its business model. The company has spent years transforming itself from a fossil-fuel based corporation into a renewable energy giant. The strategy has paid off and the shares are up about 85 percent since the IPO.

Analysts at RBC Capital Markets called the Danish state’s U-turn “surprising” and “unwelcome.” Even so, they concluded that the development isn’t a sign of potential further interference from politicians in the “wider strategy.”

But Imsgard at Sydbank says Orsted’s owners should brace for more of the same.

Investors “should be prepared for a thing like this to happen again,’’ he said. “It’s a risk that shouldn’t be underestimated.’’

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