Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Something is rotating in the state of Denmark. Dong Energy is poised to become Europe's biggest IPO so far this year with a share sale valuing the wind farm developer as high as 107 billion Danish krone ($16 billion). To buy or not to buy? Investors have reasons for Hamlet-like procrastination -- Dong is loss-making, hard to value and has few lookalike peers.

Lack of Utility
Sector's shares have fallen sharply over past two years in Europe
Source: Bloomberg

The IPO stock -- 15-17 percent of the company -- is being sold by the Kingdom of Denmark, Goldman Sachs and others. They get the windfall, while new investors get the chance for concentrated exposure to a major renewables sector via the world’s biggest player in offshore wind by market share.

Dong has promised to pay a token dividend, whose real value is the show of confidence in future cash generation. There are no profits yet. Valuation starts with Dong’s guidance that the main wind operations will generate Ebitda of 10-12 billion krone next year. Portugal's EDP Renovaveis, the closest thing Dong has to a listed peer, trades on 8.5 times this year’s Ebitda, taking forecasts compiled by Bloomberg. That suggest Dong's wind assets are worth 93.5 billion krone.

Dong Energy's Ebitda is rising
Source: Company

Dong used to be an oil and gas business before a financial shock in 2012 forced a reinvention founded on renewables. This fossil-fuel operation is still pumping, but isn’t allowed investment to expand. Its 238 million barrels of proven and probable reserves could attract a bidder. At a conservative $12 each (using Shell’s offer for BG Group as a yardstick) they'd be worth $2.86 billion (19.1 billion krone).

There’s also a domestic electricity utility, with a regulatory asset base (the value of the assets needed to provide its services) of 10.7 billion krone. Its market-leading returns would justify a valuation premium. At, say, 1.3 times the regulatory asset base, it would be worth 13.9 billion krone. Finally there’s a small, loss-making bio and thermal business. This offers some potential but as things stand it is wouldn’t add much to Dong’s overall value.

Tot it all up and, on this crude analysis, Dong is worth at least 127 billion krone on a debt-free basis. Lob off 22.8 billion krone of net borrowings and the equity is worth at least 104 billion krone. Now apply a 10 percent IPO discount -- the minimum investors should demand -- and the deal ought to be worth 93.3 billion kroner or about 220-225 krone per share. That’s around the midpoint of the deal’s price-range, rendering the share offer fair, if not a call to action. Procrastinators may be swayed by the fact there’s only one Dong.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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