A closer look at a Goldman Sachs deal many in Denmark find rotten

January 31, 2014 2:42 pm

A closer look at a Goldman Sachs deal many in Denmark find rotten

By Richard Milne, Nordic Correspondent

Goldman Sachs has faced plenty of unsavoury claims in recent years – from accusations about its role in the global financial crisis to suggestions it helped the Greek government massage its figures. Now it can be said to have nearly brought down theDanish government.

Much of the ire directed against an investment deal for a state-owned Danish utility stems solely from the involvement of the US investment bank, derided this week by protesters in Copenhagen waving banners of a vampire squid.

But – beyond Goldman’s reputation – there are five other big issues behind the controversy that are as awkward for the beleaguered Danish centre-left government, led by prime minister Helle Thorning-Schmidt, as they are for Goldman.

1. Why sell in the first place?

Dong Energy, the utility in which Goldman-managed funds are buying a 19 per cent stake for DKr8bn, has suffered since the financial crisis like many European energy groups – especially after it invested billions of krone in its quest to become a renewable energy leader.

The group owns more than a third of electricity generation capacity in Denmark but made an operating loss of DKr6bn in 2012, leaving a financial hole that needed to be filled.

The Danish government, which owns 81 per cent of Dong, decided to seek fresh equity to help prepare the utility for a possible stock market listing after it was forced to abort a previous attempt in 2008. In Octoberit announced that Goldman and two Danish pension funds, ATP and PFA, would invest DKr11bn, reducing the state’s stake to about 60 per cent. The hole was filled.

But many in Denmark remain unconvinced of the need to part-privatise a company that is so important for the country’s energy needs. Fully 80 per cent of Danes were against the idea in a recent poll.

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2. Was Goldman the highest bidder?

Just as the controversy over the sale to Goldman mounted this week amid parliamentary hearings, a bombshell was dropped: PensionDanmark, a labour market pension fund, had lodged a higher bid valuing Dong at DKr46bn compared with Goldman’s DKr32bn, television station TV2 reported.

The truth is more complex, according to people involved in the deal. PensionDanmark’s offer had different conditions to Goldman’s, making it unfair to compare the two.

The Danish government believes PensionDanmark’s offer was more akin to a loan and the fund was not willing to take enough risk. Other Danish pension funds who then piped up and said they would match Goldman’s offer were simply too late, government officials say.

3. How big a risk is Goldman taking?

Another question surrounding the deal is just how much risk Goldman is actually taking. Attention has focused on a clause that stipulates what happens if Dong is not listed by mid-2018, as currently envisioned.

The Danish finance ministry told parliament that Goldman and the two Danish pension funds would then be able to sell the shares back to the government. While 40 per cent of the shares would be returned at “a fair market value”, the other 60 per cent would be based on the purchase price plus an annual interest rate of 2.25 per cent. “They are only risking 40 per cent of the capital they inject,” says Kristian Weise, head of the centre-left think-tank Cevea.

4. Goldman’s veto rights

The sharing of risk was not the only problem people found in the finance ministry document. It also detailed how New Energy Investment – the name of the investment vehicle Goldman is using to buy the stake – will get veto rights that no other investor will enjoy.

So if Dong wants to deviate from its current business plan, change its chief executive or finance director, make a big acquisition, or sell new shares, it needs to gain the prior approval of Goldman.

That has raised heckles among Danes who fail to see why Goldman should get special treatment. But government officials argue that such rights are common when investors take a big stake in an unlisted company in order to give them some protection. Given the events of the past week, Goldman should be happy to have them.

5. Role of tax havens

Goldman is buying the Dong stake through its private equity and infrastructure arm, which invests third-party funds. But its decision to use a Luxembourg-based affiliate owned by shareholders in the Cayman Islands and Delaware to manage the investment has generated significant criticism in Denmark.

The Nordic country has the highest tax rates in the world for individuals so use of companies registered in perceived tax havens is a sensitive issue. Goldman says it is not normal for an investor to set up an investment vehicle in Denmark for one minority investment. “Goldman Sachs complies, and will continue to comply with all applicable tax laws in Denmark, Luxembourg, the United States and other relevant jurisdictions,” it adds.

Where does all this leave the deal? The Danish parliament passed it on Thursday, meaning that the investment by Goldman and the two pension funds should be finalised in February.

The US bank, which has been stunned by the sudden ferocity of the Danish debate, is hoping that the public anger will not contaminate its other local investments – not least the outsourcing company ISS that is currently contemplating a stock market listing of its own.

The Danish government, meanwhile, still faces public scrutiny over the deal and questions about why it accorded Goldman certain conditions. Whatever the outcome, it offers a lesson for Ms Thorning-Schmidt’s administration, which lost one of its coalition partners over the deal on Thursday.

Mr Weise says: “The Danish population has shown it’s more critical [than previously believed] of the type of financial capitalism that is dominating around the world. The Social Democrats should ignore that at their peril.”


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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