Ørsted emerges from the water with $580m Lincoln buyout

Danish utility Ørsted has been talking for months about a plan to grow its offshore wind-focused arm back into the onshore sector. In February, CEO Henrik Poulsen said the utility was looking at onshore wind, solar and storage to expand its renewables coverage after selling its oil and gas operations.

We didn’t need to wait long for the company to make its first move. Ørsted revealed yesterday that it is buying US onshore developer Lincoln Clean Energy from investor I Squared Capital in a $580m deal. I Squared has owned 90% of Lincoln since 2015, with the Lincoln management team led by CEO Declan Flanagan owning the rest.

The deal is due to conclude by the end of 2018 subject to regulatory approval, and will mean Ørsted owns 100% of Lincoln, which is set to keep operating as a separate unit outside of the utility’s wind division. This may sound like an about-turn from Ørsted given that it exited the onshore sector in 2014, but we think the logic for the deal is simple.

For Ørsted, the attraction of onshore is clear. The company has established itself as a leader in the offshore sector, and this will help it to expand across renewables.

The US is an attractive market too. Ørsted already has a presence in the US, as it is seeking to develop the 800MW Bay State Wind project with Eversource off the east coast. Yes, it missed out on support in the first Massachusetts offshore wind auction in May, but we expect Ørsted to win backing for this scheme as it has for many other projects around the world. It is due to bid in auctions in New Jersey and New York.

And the US offers projects that are attractive to a firm of Ørsted’s size, with revenue of more than $9bn in 2017. We wouldn’t expect it to start mucking around building a portfolio of 20MW onshore wind farms in France, for example. However, as Lincoln’s Flanagan told us in an interview in our North American Power List in May, its projects have been around 250MW-300MW recently. These will make sense to Ørsted.

We can contrast this with Ørsted’s previous foray in onshore wind back in its days as Dong Energy. In 2013, it sold a 196MW onshore wind portfolio made up of 80 sites with 272 turbines; and exited onshore wind in 2014. A portfolio like that takes a lot of asset management and the utility didn’t think it could gain competitive advantage. It makes far more sense for it to focus its onshore efforts on large schemes.

Its approach isn’t novel either. When we first heard this news, the first company we thought of was Copenhagen Infrastructure Partners, which is working on offshore projects globally – including the 800MW Vineyard Wind in US waters with Avangrid Renewables – and also gets involved in large onshore schemes in the US. Iberdrola subsidiary Avangrid is a good example of a US onshore and offshore player too.

And the final benefit we see for Ørsted is the expertise it is buying into. Flanagan is a veteran in the US market. He has been there since 2003, when he set up Airtricity’s US arm that E.On bought for $1.4bn in 2007. He then helped to build E.On into a top five owner of wind farms in the US before quitting to set up Lincoln in 2009.

Ole Kjems Sørensen, EVP at Ørsted and its head of partnerships, M&A and asset management, said Lincoln would provide it with “a strong growth platform in one of Ørsted’s strategic growth markets”.

For Lincoln, one benefit of linking up with a giant like Ørsted is the utility’s financial firepower. As Flanagan told us in May, the developer is looking to secure backing for 1GW of onshore projects between October 2018 and June 2019, and Ørsted can help with that. I Squared wasn’t shy of investing, but Ørsted is in another league.

Speaking in the release on this deal, he said that he looked forward “to replicating [Ørsted’s] leadership [in the offshore wind sector globally] in onshore wind in the US”. He also said it would help Lincoln to execute its projects and increase its growth trajectory.

Ørsted’s focus in recent years has been on selling its fossil fuels operations. Now it has moved onto the next stage: acquisition-led growth.