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Morningstar | We See Other Value Levers After Danish Government Blocks Sale of Orsted's Distribution Business

On Jan. 13, Orsted announced that the Danish government no longer supports the divestment process of its Danish power distribution, retail, and city light businesses. As the state is the majority shareholder with 50.1% of the capital, this means the disposal is scrapped. This is surprising, as the disposal had been approved by Orsted's board of directors in June 2018 and there was already a restricted list of potential buyers, including pension funds. This is also disappointing for us as we incorporate in our fair value estimate a premium from the sale of these activities. However, we see other potential value levers and therefore leave our fair value estimate unchanged. The group has not changed its DKK 200 billion investment plan through 2025. The shares appear slightly undervalued.

The up-for-sale activities were 6% of the group's 2017 EBIT. We viewed the rationale of the sale as strong as these activities have no moat and returns below offshore wind power, where Orsted is the global leader. However, due to their high returns visibility, we believed these assets would have enticed financial players such as pension funds willing to pay a high price to acquire them. Accordingly, we valued these assets at an enterprise value/EBITDA of 15.6--the average of comparable transactions in Europe since 2015--in our calculations. The related premium to the discounted cash flow-based value of these activities accounts for DKK 20, or 4% of our fair value estimate. Still, we leave our fair value estimate unchanged as we view other potential value-creation levers that we have not factored in, especially a farm-down of a big project under construction in which Orsted has a strong record. The last one is the disposal of 50% of the 1.2-gigawatt Hornsea 1 project in the U.K., which generated a mostly tax-free profit of DKK 18 billion, implying a value-accretive impact of DKK 40 per share. The 1.4 GW Hornsea 2 project under construction would be a good candidate for a farm-down.