Will Mitsubishi Heavy Put Wind in the Sails of Vestas?

on Sep 4, 2012
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With a share price collapse in recent years, continuous job cuts and deepening losses, Aarhus, Denmark-based wind turbine manufacturer Vestas Wind Systems (CPH:VWS) is living the lyrics of an old Scandinavian folk song, that it’s not an easy job to sail without wind. Recently, the Financial Times published an article on the multiple challenges before the world’s largest wind turbine maker which is now looking for a “potential strategic cooperation” with the Japanese Mitsubishi Heavy Industries (TYO:7011). The talks are being seen as a much-needed glimmer of hope for Vestas investors.

According to the FT article, Vestas, the world’s largest turbine manufacturer by volume, has been fighting for survival after a 94 percent nose-dive in its share price in the past four years, with many of the company’s woes being attributed by commentators to dubious decision making in the financial crisis, such as ill-timed expansion. “You have a company with little cost control, inadequate capital control and in some of their factories no operational control. It is business school 101 on how not to run a company,” was the acerbic assessment of Martin Prozesky, analyst at Bernstein Research, as quoted by the FT. And, according to Bloomberg data, Vestas stock has fallen as much as 45.3 percent in 2012.

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!m[](/uploads/story/319/thumbs/pic1_inline.png)In addition, the company has suffered from shrinking public subsidies for wind power generation, particularly in Europe and in the US. Compounding that problem, the competition is growing from Chinese companies such as Xinjiang Goldwind Science and Technology Co. Ltd. (HKG:2208), further complicating the situation for western wind turbine manufacturers generally. No wonder then that 2013 is going to be another tough year for Vestas, with Bloomberg recently reporting that the company is expecting a decline in wind turbine installations, necessitating additional job cuts. Bloomberg quotes Vestas’ CEO Ditlev Engel as saying in an interview that the company would get to about 3,700 job cuts before the end of 2012. “That’s preparing for what we expect to be quite a tough 2013,” he pointed out. Vestas expects shipments to decline to 5GW in 2013, which will result in a lower activity level.

Seemingly the only positive news surrounding Vestas of late is of the talks on cooperation with Mitsubishi Heavy Industries, with the FT reporting that some investors see the Japanese company as a potential saviour of Vestas, particularly vis a vis offshore turbines. Jacob Pedersen, an analyst at the Danish Sydbank, describes the rumoured cooperation as a “strategically good match”, since Mitsubishi could help Vestas develop the costly offshore turbines. The new Vestas chairman, former Sony Ericsson president Bert Nordberg, has indicated that he is looking for an investor to take a 10-20 percent stake.

Others, however, are more sceptical about the potential cooperation between Vestas and Mitsubishi. Analyst Prozesky points out that since the Japanese company “brings more to the table” only a full takeover would make sense, and believes that the talks demonstrate the need for a radical change for Vestas. “In one year’s time there is no question: there will be different ownership and capital structure. The cash is not coming from the operations”, the FT quotes him as observing.

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