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No listed Nordic company has ever raised more capital in one go than Ørsted, which on Monday launched a DKr60bn ($9.4bn) rights issue. What’s more, Ørsted is doing so at a time of unprecedented turbulence in the renewable energy industry. Its bankers will want to make sure that they’re not left holding the bag.
The Danish power group is raising money equivalent to more than 70 per cent of its current market capitalisation, printing new shares at a huge discount. The price of DKr66.6 per share is 38 per cent below where, all else being equal, the stock should settle after the capital raising is complete. That’s known as the “theoretical ex-rights price”.
Rights issues like Ørsted’s are supposed to compensate investors for dilution when a company issues new stock at a discount to the prevailing market price. Investors can put in more cash at the offer price, or sell their entitlement to buy new shares. Without these “tradeable rights”, they would lose out to new entrants. This arrangement is common in the UK and Europe, and rare in the US.
Financial textbooks teach that when a company issues tradeable rights, the discount for the new shares doesn’t really matter. The proceeds from selling rights should fully compensate those who decide not to take part. While the real world doesn’t totally hew to the model, and can leave some investors slightly out of pocket, it is a close enough description.
But the discount does matter in one way. If the shares fall below where the company priced its new stock, the rights become worthless, leaving banks that underwrote the issue on the hook. That miserable situation befell UK lender Bradford & Bingley in 2008. Its rights issue was reset three times, before the bank failed.
A 38 per cent discount leaves plenty of room for error, surely? Perhaps not for a company with as choppy a recent history as Ørsted. Its stock fell by a third on August 11th when it said it needed extra money to carry out its business plan. It later fell by 16 per cent when Donald Trump’s US government forced it to stop work on a US wind farm. A bigger project, Sunrise Wind, is still in progress, but in light of Trump’s unpredictability, that can’t be taken for granted.
Given the uncertainty, underwriters — which include Morgan Stanley, BNP Paribas, Danske Bank, JPMorgan and others — will welcome the buffer. There’s a psychological balancing act too: at too deep a discount, there’s the risk that investors perceive the company is in deep distress.
Ørsted and its financiers seem to have got the balance right. The shares barely moved as details of the rights issue were disclosed. Granted, even once it has its funds, Ørsted has plenty of uncertainty ahead. But at least the company is planning for the worst, and hedging Trump risk as best it can.
camilla.palladino@ft.com
