The State Ownership Dilemma - A valuation of Kongsberg Gruppen ASA Jacob Hartwig & Ola-Jo Holthe Semb Master’s Thesis MSc. Finance & Strategic Management MSc. Applied Economics & Finance Copenhagen Business School Supervisor: Flemming Strøm Date: 03.06.2015 119 Pages (272.677 characters) Executive Summary When the current Norwegian government was elected they had increased privatization high on the agenda, and one of their goals was to reduce their ownership in Kongsberg Gruppen KOG from 50.01 percent to 34 percent. KOG is a high-technology group that is involved in both maritime and defense operations. The company’s defense technology is seen as highly sensitive with regards to national security and it is therefore important for the Norwegian government that the company stays on Norwegian territory. Currently, there are no Norwegian regulations that can prevent the company from leaving the country if the government reduces its ownership share. Hence the government decided to not take any action on the issue until the right regulations are in order. The authors found both the discussion regarding state-ownership effectiveness and the ongoing debate about the government’s ownership reduction in KOG very interesting. Therefore, the overall objective of this thesis has been to combine a thorough analysis of state-ownership and its impact on KOG with a ‘sum-of-the-parts’ valuation in order to assess whether KOG’s stock is trading at a state ownership discount. A hypothesis that the marginal investor could benefit from a divestment of the maritime segment was also established. Before investigating whether the discount could be attributed to the prevailing ownership situation, it was essential to investigate if there exist such a phenomenon as a ‘state-ownership discount’. Through an extensive empirical review the overall impression was that private ownership was superior to state ownership. Several theories explaining this was presented ranging from stronger incentives, increased competition and the reduction of agency costs. Furthermore, our own regression analysis pointed towards a negative effect of state-ownership on firm valuation and the interviews with analysts indicated that a divesture of the maritime division was something that had been discussed by investors for a long time. In order to assess how the Norwegian Government’ majority ownership in KOG affects the company, it was necessary to split KOG’s divisions into two segments; KOG Defense and KOG Maritime. Further, a strategic and financial analysis was conducted in order to analyze the prospects of the individual business units. Both divisions were then valued using a fundamental analysis and a discounted cash flow (DCF approach). The analysis yielded a theoretical stock price of NOK 204.17 as of April 14th 2015. Compared to the market price of NOK 165.00, the valuation indicates a discount of 24.04%. Through a historical analysis it became evident that both divisions were trading at a discount relative to peers and that the discount is larger for the Maritime segment. Hence, it was concluded that a state-ownership discount exist in terms of the company’s equity value. Lastly, a scenario analysis revealed that there are strong reasons to believe that the discount of KOG Maritime can be explained by the negative effects of state ownership and that the most attractive scenario for the marginal investor is for the Government to divest the division 1. Introduction Tabl e of Contents 1. Introduction ............................................................................................................................................3 1.1. Context and Motivation ...................................................................................................................... 3 1.2. Problem Statement ............................................................................................................................. 4 1.3. Methodology...................................................................................................................................... 7 Delamination and Assumptions.................................................................................................................. 8 2. State Ownership and its Implications for Company Valuation................................................................9 2.1. Ownership and its Influence ................................................................................................................ 9 2.2. Perspectives and Theories regarding State- vs Private Ownership ........................................................ 11 2.3. Empirical Review of State versus Private Ownership .......................................................................... 13 2.4. The Norwegian Government’s Strategy in terms of Current and Future Ownership ............................... 16 2.5. Testing for the Effect of State Ownership in the Norwegian Market – Regression Analysis ................... 17 2.6. Financial Analysts’ Approaches to State Ownership and KOG ............................................................ 19 3. Introduction to Kongsberg Gruppen .....................................................................................................23 3.1. Kongsberg Gruppen’s History ........................................................................................................... 23 3.2 Kongsberg Gruppen’s Operations ....................................................................................................... 23 3.3. Kongsberg Gruppen’s Strategy .......................................................................................................... 26 3.4. Ownership, management and organization ......................................................................................... 26 3.5. Share price development and major events ......................................................................................... 26 3.6. The Defense Industry........................................................................................................................ 27 3.7. Maritime industries........................................................................................................................... 30 4. Strategic Analysis..................................................................................................................................33 4.1 PESTEL ........................................................................................................................................... 34 4.2 Porter’s Five Forces........................................................................................................................... 57 4.3. VRIO Analysis................................................................................................................................. 69 5. Financial Analysis .................................................................................................................................75 5.1. Reclassification of Financial Statements ............................................................................................ 75 5.2 Peer group ........................................................................................................................................ 79 5.3. Profitability Analysis ........................................................................................................................ 82 5.4. Liquidity Risk Analysis .................................................................................................................... 86 Page 1 of 277 1. Introduction 6. SWOT Analysis .....................................................................................................................................88 7. Forecasting............................................................................................................................................91 8. Cost of Capital ....................................................................................................................................100 9. Valuation ............................................................................................................................................106 10. Sensitivity Analysis............................................................................................................................111 11. Scenario Analysis ..............................................................................................................................112 11.1. Scenario I: Keep the company consolidated .................................................................................... 112 11.2 Scenario II: The Norwegian Government Divests KOG Maritime ..................................................... 114 12. Conclusion.........................................................................................................................................117 13. Thesis in Perspective .........................................................................................................................119 Re fe re nces...............................................................................................................................................120 Appendices .............................................................................................................................................130 Page 2 of 277 1. Introduction 1. Introduction 1.1. Context and Motivation The Norwegian Government