Vestas Valuation Tempting Buyers Tilting at Windmills: Real M&A

Vestas Valuation Tempting Buyers Tilting at Windmills
Vestas attributed the loss to higher-than-expected development costs from its flagship V112 turbine and a delay in starting a generator factory. Photographer: Ken James/Bloomberg

For companies prepared to buy into the future of wind power, Vestas Wind Systems A/S offers the chance to grab the world’s largest turbine maker for less than it would be valued at in a fire sale.

Vestas traded at a record low of 0.52 times net assets last week, according to data compiled by Bloomberg, before speculation emerged that its two biggest Chinese rivals, Sinovel Wind Group Co. and Xinjiang Goldwind Science & Technology Co., are considering a bid. Even after Vestas jumped by the most in more than two months, it was still valued at a 76 percent discount to sales yesterday, less than any renewable-energy equipment maker with at least $1 billion in market value.

While Vestas lost money on each dollar of sales last year as turbine prices fell and is now grappling with the loss of wind-project subsidies in the U.S., Spain and India, the Aarhus, Denmark-based company could still lure buyers with its technological expertise and market position, Sydbank A/S said. Sinovel and Goldwind, which get almost all their sales in China, could expand in the U.S. and Europe by acquiring Vestas, while industrial companies in South Korea may want Vestas to gain a foothold in wind energy, Sydbank and Danske Markets said.

“Vestas has one of the most developed technology platforms and a truly global distribution network,” Kasper From Larsen, an analyst at Danske in Copenhagen, said in a phone interview. “You’re getting the asset right now for a very low price. You could have several industry players looking at the company.”

Today’s Trading

When asked this week in an interview at the European Wind Energy Association conference in Copenhagen whether the company has received any takeover approaches or whether it would entertain any offers, Vestas Chief Executive Officer Ditlev Engel declined to comment.

Shares of Vestas climbed 5.1 percent to 54.05 kroner as of 5:16 p.m. in Copenhagen today. The gain was the second biggest in Europe’s benchmark Stoxx Europe 600 Index.

Vestas was set up in the small farming town of Lem in 1898 in a blacksmith workshop, becoming a manufacturer of steel window frames for industrial buildings and later household appliances and agricultural equipment, according to its website. The company delivered its first wind turbines in 1979 and is now the world’s biggest wind turbine maker, reaching 50 gigawatts of cumulative installed machines this year -- about a fifth of the global total, according to the company’s website and the Brussels-based Global Wind Energy Council. A gigawatt is about enough power to supply 800,000 homes in the U.S.

After increasing revenue each year for a decade since going public in 1998 and posting record operating earnings in 2008, Vestas had sales declines in two of the past three years and posted a net loss in 2011 as falling turbine prices squeezed margins and growth in installations across the industry slowed.

Costs, Delays

Vestas, with a market value of 10.5 billion kroner ($1.9 billion) as of yesterday, attributed the loss to higher-than-expected development costs from its flagship V112 turbine and a delay in starting a generator factory.

The company’s chief financial officer resigned in February, a month after Vestas said it would cut 2,335 jobs as part of cost-reduction measures.

Industrywide, prices of turbines sold in the second half of 2011 fell to 910,000 euros ($1.2 million) a megawatt, the lowest since at least 2008, when records began, according to Bloomberg New Energy Finance. Wind-power installations, which grew at an annual rate of about 36 percent in the five years through 2009, expanded just over 5 percent the following two years combined, according to Global Wind Energy Council data, as banks tightened financing and governments threatened to rein in support for clean-energy projects.

Renewable-Energy Subsidies

Spain in January declared a moratorium on subsidies to new renewable-energy plants, while India, the world’s third-biggest wind market, reduced a tax break this month.

In the U.S., the second-biggest turbine market after China, a Treasury grant program offering as much as 30 percent of development and construction costs for renewable-energy plants expired on Dec. 31. Another incentive, the Production Tax Credit, expires at the end of 2012. Vestas in January said it may cut an additional 1,600 jobs in the U.S. if lawmakers don’t extend the credit, which gives an incentive of 2.2 cents a kilowatt-hour of wind power.

Vestas stock, which reached a record 692 kroner in June 2008, fell 72 percent in the past year to 51.45 kroner through yesterday, data compiled by Bloomberg show.

‘Tough Time’

“Vestas is going through a pretty tough time,” Edward Guinness, who helps oversee $900 million at Guinness Asset Management Ltd. in London, including Vestas shares, said in a phone interview. “They really have not coped brilliantly with the falling prices of turbines and it’s a disappointment that they didn’t act faster on bringing costs down. There’s been hope that things would get better, and they haven’t.”

The slump in Vestas shares left the company trading at a 48 percent discount to the value of its assets minus liabilities, its lowest price-to-book ratio on record, data compiled by Bloomberg show, before speculation emerged this week about the company attracting takeover interest.

Sinovel and Goldwind are considering a bid for Vestas, the newspaper Jyllands-Posten reported this week, citing unidentified people it said were close to the process. After the report, Danish Energy Minister Martin Lidegaard said the government wouldn’t block a possible bid for Vestas by a Chinese company.

Xiao Qiang, media manager for Beijing-based Sinovel, said the company had no comment as to whether it’s considering a bid for Vestas. A spokesman for Goldwind said the Xinjiang-based company also declined to comment.

Discount to Sales

Even after gaining more than 5 percent this week, Vestas still traded yesterday at 0.54 times book value, compared with an average price-to-book ratio of 3.08 for renewable-energy equipment makers with a market capitalization greater than $1 billion, data compiled by Bloomberg show. A price-to-book ratio of less than 1 implies a company would fetch more if shareholders fired management and sold all of its assets.

Vestas also traded at 0.24 times its sales, the lowest of the group, the data show.

For Sinovel and Goldwind, which derive the bulk of their revenue in China, purchasing Vestas would give them access to markets around the world and to the company’s technology, according to Jacob Pedersen, an Aabenraa, Denmark-based analyst at Sydbank. Vestas wind turbines operate in 69 countries worldwide, according to the company’s website.

‘Strategic Sense’

“It makes very good strategic sense for the Chinese companies,” Pedersen said. “What they lack is quality and presence outside China, and that’s exactly what Vestas has got.”

Vestas could also be of interest to large companies in Japan, where the government has been pushing for alternatives to nuclear energy after last year’s Fukushima disaster, and in South Korea, which is setting itself up as a green technologies manufacturing base, Pedersen said.

For a diversified company such as General Electric Co., which makes everything from wind turbines to medical-imaging equipment, Vestas may also be a good fit, said Danske’s From Larsen. The Danish turbine maker could help Fairfield, Connecticut-based GE expand its wind operations and add to its technological expertise, he said. Lindsay Theile, a spokeswoman for GE, declined to comment.

Despite the takeover speculation, short sellers have become increasingly pessimistic on the prospects for Vestas. In a short sale, traders sell borrowed stock on the assumption the price will decline and enable them to profit by buying the shares back at a lower price.

Bearish Bets

More than 22 percent of Vestas’s 203.7 million outstanding shares were sold short as of April 17, the highest percentage on record for the company, according to New York-based research firm Data Explorers. Short interest in Vestas also exceeded 597 stocks in the Stoxx Europe 600 Index, in which companies average about 3 percent.

Vestas may have trouble luring a buyer while the wind industry faces a decline in demand and excess production capacity, according to David Vos, a London-based analyst at Sanford C. Bernstein & Co. The company can manufacture more than 8,500 megawatts of turbines a year, according to its annual report. Turbine production and shipments totaled 5,054 megawatts last year, or about 60 percent of capacity.

“It doesn’t make sense for any player to add so much capacity to their operations at this point in time,” Vos said. “The major conglomerates who might have the spending power to purchase assets have overcapacity themselves, and you’re facing a structural demand decline over the next two or three years.”

China Headwinds

Speculated Chinese buyers such as Goldwind may find it difficult to get financing for a large acquisition, according to Guo Shou, a Hong Kong-based analyst at Barclays Capital. Goldwind, which has a market value of about $3 billion, said last week that profit may have been wiped out in the first quarter as the wind market slowed and prices fell.

Still, the wind industry’s long-term growth potential could make Vestas attractive, said Guinness at Guinness Asset Management. The Global Wind Energy Council forecasts annual wind installations will grow at an average of 8 percent a year for the five years through 2016, more than doubling total installed capacity worldwide.

Vestas predicts shipments to rise to 7 gigawatts of turbines this year from 5 gigawatts last year. The company’s backlog of orders rose to 9,552 megawatts at the end of 2011, worth about 9.6 billion euros in future sales, a record for the company, according to its annual report, and analysts project the company will return to profit this year.

Long View

A strategic buyer could afford to pay about 80 kroner a share because it can “unlock value through restructuring and synergies,” Patrick Hummel, an analyst at UBS AG in Zurich, said in an e-mail. While that would equate to more than a 55 percent premium to yesterday’s closing price, it would still value Vestas at a 16 percent discount to its book value of 94.68 kroner a share, data compiled by Bloomberg show.

“Ultimately, you’ve got a good, solid business here with a very attractive product that is just going through a low point in the cycle,” Guinness said. “You have to have a long-term perspective.”

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