Danish Wind Power Giants Merge

Two of the largest wind turbine manufacturers plan on combining their operations into one powerhouse Danish wind energy company, gobbling up 35 percent of the worldwide market, employing 8,500 people and boasting anticipated 2004 sales of EUR 2.7 billion (US$3.31 billion).

Ringkoebing, Denmark – December 15, 2003 [SolarAccess.com] Two of the largest wind turbine manufacturers plan on combining their operations into one powerhouse Danish wind energy company, gobbling up 35 percent of the worldwide market, employing 8,500 people and boasting anticipated 2004 sales of EUR2.7 billion (US$3.31 billion). Citing size, technological know-how and development as well as financial strength as the major prerequisites for growth and long-term survival in today’s highly competitive international wind market, Denmark-based Vestas and NEG Micon will become one wind power entity offering a variety of multi-MW wind turbines for the world market. “Size is not a goal in itself, but it is necessary for us to meet our customers’ requirements for ever larger, more powerful and more complex turnkey solutions,” said Joern Ankaer Thomsen, Chairman of NEG Micon. “Technology innovation is a demanding and investment-intensive aspect of our industry, but also a basic requirement for having competitive strength. Only those able to meet these challenges will be able to generate profitable growth. And although we may each be large players on our own account, it is by no means certain if that will be sufficient to compete in the global market of the future.” Cornering a large share of a particular market however has its particular advantages and disadvantages. “The combined market share of around 35 percent may be unsustainable going forward as this number may drop closer to 30 percent,” said renewable energy industry analyst Bob Preston, GP of Craigmillar Energy LP, who currently holds Vestas Wind Systems stock in the form of ADRs. “Nevertheless, margins could improve by better pricing on both the sale of turbines and the sourcing of components.” Both NEG Micon and Vestas have stated that a 30 percent market share would be maximum for any one player in the wind turbine business, according to Preston. Major buyers, like FPL Energy in the US, will encourage competition by spreading out their contracts among a number of manufacturers with no one manufacturer, even General Electric (GE), having too large a market share, he said. “It’s an advantage to be a market leader, but if you dominate market share it could become a weakness in a volatile business whereas smaller players have more flexibility in pricing,” Preston said. Despite these potential issues, Preston doesn’t see the new merger as holding too big a share of the market. He suspects that as the market matures, the combined entity will focus on margins instead of capturing further market share. “Nevertheless, margins could improve by better pricing on both the sale of turbines and the sourcing of components,” Preston said. Since no major business deals operate in a vacuum, and are likely the result of major outside influences then what are some market factors driving this merger? Two major things happened to the wind energy industry in the past couple years that may have contributed to this – the powerful U.S.-based GE has joined the market, and the U.S. wind industry’s crucial tax credit, the PTC will expire at the end of this year, greatly depressing U.S. project construction next year. “No doubt the delayed PTC is negatively affecting 2004 projections in the US and lower sales certainly encourage industry consolidation,” Preston said. Merger statements from Vestas also hint at the PTC as having at least been part of the picture, if not a major part of the consolidation’s catalyst. “Germany, Spain and the US continue to be viewed as the three most significant markets for wind turbines,” said a Vestas statement. “Whilst the US is a particularly important market it has a history of volatility due to its dependence on the Federal Government’s Production Tax Credit incentive scheme. The current Production Tax Credit scheme is due to expire at the end of 2003 and approval for extending the scheme into future years has not yet been forthcoming.” While facing at least a U.S. downturn next year, the wind industry as a whole is often cited as the fastest growing energy industry. “The cumulative installed capacity of wind power (MW) has doubled since 2000 and has quadrupled since 1998,” according to a Vestas merger statement. The company also cited a recent study, BTM Consult World Market Update 2002, that reflects the growth of the technology embracing economies of scale. The study showed that technological developments have resulted in the commercial production of larger, more efficient wind turbines. For example, in 2002 the average MW capacity of a wind turbine installed was 1.3 MW compared to 790 kW in 2000. Both sustained industry growth, and the technological direction towards economies of scale are major reasons why companies such as GE entered the market recently. “This (merger) is a significant move because wind is the most competitive new energy technology that’s renewable with immense potential,” Preston said. “It is the fastest world source of new electricity. GE is becoming a major player and a fierce competitor. These two Danish companies should have a relatively effective integration that could match GE. There is less of reason for Denmark, the pioneer of wind, to compete against themselves in this global market as the Danish market may have matured years ago.” Preston said Japan’s Mitsubishi wind division could also emerge as a major player, and a number of other companies may see this as an opportunity to participate in the growing wind industry. The consolidated companies will likely review possible changes to their previous business models. “NEG Micon’s approach to marketing, through their wholly owned subsidiary Global Renewable Energy Partners (GREP), may be under review as the Vestas approach was through independent project developers,” Preston said. “I believe the Vestas model will prevail. It was always a bit awkward when independent developers were buying NEG turbines and at the same time competing with GREP on projects. In as much as there may not have been any preferential treatment on price, the perception lingers.” Troy Helming of Kansas Wind Power is one developer who was caught off guard by this industry move but echoes some of Preston’s thoughts on the new company. “We expected consolidation in the wind turbine manufacturing space, but not this soon,” Helming said. “We had some competitive bids from both companies, so it is unfortunate that this takes a player out of the space and effectively reduces competition somewhat. On the other hand, it could mean better economies of scale for Vestas and hence even more competitive pricing. Assuming the tax credit passes next year, we are eager to too see how it impacts equipment pricing on 2005 projects. The combination of the two companies will be effected through an offer to NEG Micon shareholders to exchange their shares for shares in Vestas, which will be the continuing company. This will require a capital increase in Vestas, and a proposal to that effect will be submitted for approval at a general meeting to be held on 30 December 2003. One NEG Micon share will be exchanged for one new Vestas share, representing an exchange ratio of 80:20 and implying about a 30 percent premium to NEG Micon’s shareholders.
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