Denmark's Elsam-DONG merger faces resistance

Dec 17, 2004 01:00 AM

The Danish government plans to meld oil and gas company DONG and power company Elsam into an $ 8.8 bn national energy champion look like they could short-circuit.
Dissident Elsam shareholders are weighing a rival offer from Vattenfall Group, Sweden's state utility.

The burden now appears to be on the Danish government, which is negotiating on behalf of DONG, to improve the share-swap deal for Elsam, but so far it's not budging. And even if it does, concessions may not even be enough to corral all the 23 smaller power companies that own Elsam into approving the merger, analysts say.
"Some want to get the money from Vattenfall offer now, while others want the fusion to create a Danish champion," said Magnus Hindsberger, an energy analyst with Nordic consulting firm ECON.

DONG currently holds 24 % of Elsam through two subsidiaries. A full-blown amalgamation with the oil company will be scuttled without at least two-thirds of Elsam's shareholders favouring the deal in a vote scheduled in January. The Danish government has said it's not interested in sharing control with Vattenfall.
But, Henry Lei Jacobsen, a spokesman for a consortium of shareholders that's negotiating with Vattenfall, said the current DONG merger deal is inadequate on a number of fronts, including a lack of operating synergies. The key sticking point, though, is a clause that would require shareholders to hold onto to the vast majority of their equity in a merged company for a minimum 10 years, he said.

Under the plan cobbled together by the government and agreed to by managements of both companies, a merged entity would be created from the 28 bn kroner ($ 1 = DKK 5.58) share capital of Elsam and the DKK 21 bn share capital of DONG.
A holding company would also be created and required to maintain a 50.1 % stake in the combined company. The state would have to own at least 50 % of the holding company while Elsam shareholders would own at least 25 %. The holding-company arrangement would allow the government to proceed with plans to privatise just less than half of the merged company.

If DONG could offer Elsam shareholders a mechanism to allow them to sell their merged-company shares at, say, DKK 1,400 a share, "then it would be difficult to say (the merger) was a wrong solution for Elsam, because one could opt out," Jacobsen said.
But Carsten Mai, a spokesman at the Danish Finance Ministry, which has been instrumental in crafting the DONG-Elsam deal, reiterated the ministry's position: no further tinkering was required.
"The (Danish) finance minister (Thor Pedersen) has a deal with Elsam's chairmanship, and the finance minister will stick to this agreement," said Mai.

He labelled as "peculiar" attempts by dissident shareholders to court Vattenfall, which is owned by the Swedish government, when the generally agreed-upon strategy is to privatise Danish energy assets to encourage competition. The government had intended to sell up to 49 % of DONG next year.
That hard-line view may soften, however, analysts say. The prospect of key Danish energy assets -- Elsam is the country's largest power producer -- falling into Vattenfall's hands is likely to prompt modifications, they say. The Danish government probably won't up its Elsam DKK 28 bn valuation, which values a share at DKK 1,400. But the government could change certain conditions, such as allowing Elsam shareholders to get cash rather than a stake in the new company, they said.

Despite the government's recalcitrance now, such changes could be made, analysts believe.
"The political support for the DONG-Elsam merger is very strong," said one Stockholm-based analyst.
Earlier, the government stepped in to revive talks after disagreements surfaced between DONG and Elsam executives over valuations, strategy and leadership of a new merged entity. Under a current agreement with Elsam management, shareholders are restricted from selling their shares until Feb. 1.

The outcry from Elsam shareholders has catapulted Vattenfall -- which recently outlined an aggressive growth plan for itself -- into the picture as a potential white knight. Elsam management had approached the company earlier this year, when DONG first made what Elsam considered moves toward a hostile takeover. But the government-backed DONG deal sidelined those talks.
However, Vattenfall recently rekindled discussions after dissident Elsam shareholders approached the company, and launched an indicative takeover offer valuing the Danish utility at DKK 26 bn, or about $ 4.65 bn.

While the offer is slightly lower than the DKK 28 bn, or $ 5 bn, valuation the government has attached to Elsam, it appears to be crucially devoid of any share lockup strings.
Jacobsen said he expects Vattenfall to table a formal offer in mid-January, timed just ahead of the expiration of the Feb. 1 share-sale restraint deadline.

Source: Dow Jones
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