The Government has confirmed it will use a deferred payment method for the Meridian Energy share offer – allowing investors to pay for their shares in two instalments, with 60% of that upfront.
It is planned "subject to market conditions" for the sale of 49% of the largest state power company to be completed, with a listing on the NZX and also in Australia by early November.
The sale will be conducted via "instalment receipts", a method the Government used here when it floated Capital Properties in 1998.
Labour's SOE spokesman Clayton Cosgrove said the Government's plan was a desperate "buy now, pay later" scheme.
"In the Mighty River Power sell-off the deal was ‘buy 25, get one free’. Now John Key is trying the old used car salesman gag of ‘buy now, pay later’. When this trick fails, what’s next? A free set of steak knives? This guy will give you anything but it’s the taxpayer who pays."
Finance Minister Bill English said the "first instalment" would be for around 60% of the share price, and would be paid when investors apply for shares.
“The remaining amount, which will be fixed at the end of the share offer, will not need to be paid for a further 18 months.”
Between the first and second instalments, investors would receive the full dividends paid out in that period, which would make the dividend yield – or return on their investment – higher in those first 18 months.
Such a sweetener by the Government - effectively front-loading the returns on Meridian comes amid the backdrop of the Mighty River Power float earlier this year, which raised $1.7 billion for the Government but ultimately only attracted 113,000 investors - against 440,000 who had originally expressed interest in buying them.
Another key sweetener being offered this time around is that the price for the Meridian shares will be "capped" for "ma and pa" investors. The policy of offering shares in an "indicative price range" with investors having to send in their cheques before knowing how much they will be charged has come in for criticism.
Talking up
Prime Minister John Key was busily talking up the prospects of the float and encouraging Kiwis to take part. He confirmed the Government would, as it did for MRP, target 85% to 90% Kiwi ownership.
Meridian Energy, would benefit from a broader shareholder base. It and MRP would "end up being better, stronger companies for the rigour and transparency that being listed on the sharemarket brings".
“Both companies will also be better off because they will be able to access capital to grow in more ways than companies that are 100% government owned – which is basically from the taxpayer.”
Key said it "should be remembered" that the whole Government share offer programme covered less than 3% of the Government’s total assets.
“It’s smart reinvestment. With so many demands on government funding, these companies can get investment from sources other than just hard-working taxpayers, and taxpayers can get money freed up for spending on other priority projects that they will benefit from.”
Key was "confident" Kiwis would understand the instalment receipts model being used for the Meridian share offer.
"It is not an uncommon model with large share offers. I think New Zealanders will view the ability to pay around 60 per cent of the share price at the time of the IPO and receive full benefits for the first 18 months as a positive feature of this offer.
"As at June this year, New Zealanders held around $118 billion in bank deposits – around 20 times the expected size of the entire Government Share Offer programme," Key said.
Key asset
Meridian is the key asset for the Government to sell.
It is much bigger than MRP and the Government has till recently been seen as likely to be look for something in the region of $3 billion to sell 49% of it.
However, that sort of valuation has been knocked, if not completely shattered, by the recent new deal struck by the Government - with the assistance of $30 million of Kiwi taxpayer money - for Meridian to sell about 14% of New Zealand's power to the Tiwai Point aluminium smelter at cheaper prices than before.
Meridian took an asset write-down of $476 million as a result of the deal.
It's being suggested now that the float might only raise in the region of $2 billion.
But that's still a lot for the New Zealand market to digest, particularly as the Mighty River shares have disappointed since listing, recently trading at $2.21 against an original offer price of $2.50.
The Government is aiming to raise $5 billion to $7 billion from its partial privatisation programme.
The money from the sale of assets will be redirected into new assets such as roading and hospitals. Success of the policy is pivotal for the Government achieving its target of a budget surplus in 2015 because while the receipts from the asset sales and reinvestment into new assets will be treated as capital spending - if the Government's asset sales programme is not successful it would be faced with the option of either cutting back on spending for new assets - or borrowing more - leading to a deficit.
After the Meridian float, Genesis Energy is the one remaining big asset, although there is also the matter of selling down the 74% holding in Air New Zealand to 51%.
Details
SOE Minister Tony Ryall said the Government had confirmed the following decisions for the Meridian share offer:
- A minimum application of $1,000 will apply for the first instalment of shares.
- Given there is sufficient public familiarity with the Government's share offer programme, there will not be a formal pre-registration process, as happened with the Mighty River Power offer.
- Retail banks ASB and ANZ and sharebroker Forsyth Barr have been appointed to the retail syndicate for the Meridian offer. The syndicate will work closely with joint lead managers Craigs Investment Partners / Deutsche Bank, Goldman Sachs /JB Were and Macquarie to market the offer to New Zealanders.
“Another difference with the Meridian offer is that we have decided to set a share price cap for New Zealand retail investors who take part in the offer,” Ryall said.
“We understand that people like to know the maximum price they’ll be paying at the time they apply to buy their shares.
“Therefore, the cap will be set at the same time that we set the price range, and it will be announced when we lodge the offer document. This will give retail investors more certainty when they apply for shares.
“It also means that if demand is such that institutions are bidding at higher prices than our price cap, then retail investors will get their shares at a lower price than that paid by the institutions.”
Information about the Meridian offer, including how instalment receipts work, is available for New Zealanders on the Government Share Offers website (www.governmentshareoffers.
Getting their share
Separately, it was announced that ANZ, ASB and Forsyth Barr have been appointed to the "Retail Syndicate" for the upcoming Meridian share offer.
Members of the syndicate are responsible for marketing the shares to New Zealand retail investors, with an emphasis on helping to achieve the Government’s objective of 85 - 90% New Zealand ownership at the time of the share offer.
They will work with the retail arms of the Joint Lead Managers for the offer (Craigs Investment Partners / Deutsche Bank, JBWere / Goldman Sachs and Macquarie) "to help New Zealanders understand how the share offer process works and how they can participate," a statement from Treasury said.
"Their work will include roadshow meetings and presentations, marketing the offer to retail investors in New Zealand, and working to get applications from New Zealanders for the offer.
"They will also provide investor education to potential New Zealand investors unfamiliar with direct investment in shares and the New Zealand equity markets, and to assist investors to understand the instalment receipts structure chosen for the Meridian offer."
The Treasury selected the Retail Syndicate from the panel appointed via a contestable (GETS) process in early 2012 for the whole Government Share Offers programme.
'Wafer thin'
Labour's Cosgrove said the detail on the "buy now, pay later scheme" was "deliberately wafer thin".
"But it’s likely to be yet another cost to the taxpayer. The 40 per cent of shares that investors get 18 months to pay for will have to be held by the Government.
“The Government will hold onto hundreds of millions of dollars worth of shares while investors get dividend payments for shares they don’t own. Presumably this money will have to be borrowed or will they dip their fingers into the Future Investment Fund yet again?
“John Key promised New Zealanders that the money from asset sales would go into the Future Investment Fund to build schools and hospitals. Yet we know $40 million of that fund will pay for the free shares investors got from the Mighty River Power float.
“John Key is desperate to get Kiwis to buy shares. He knows that just 14 per cent of Kiwis have any interest in buying Meridian shares, which is half the number who wanted to buy into Mighty River. That’s because Mighty River’s share price is currently 30 cents lower than when it floated.
“Kiwis know a bad deal when they see one. Despite all John Key’s skills as a salesman, he knows the only way to get buyers for Meridian is to sell it at a low price.
“John Key needs to get Meridian sold, no matter what the cost. Treasury says the float will raise $3.1 billion, but latest valuations say it’s worth just $2.1 billion The cost is $1 billion,” Cosgrove said.
12 Comments
"Under the instalment receipt structure, investors could collect three dividends before they have paid for the shares in full. It’s likely investors would be asked to pay about half of their investment at the October initial public offering, and the balance after receiving the third dividend," Street Talk said.
Hmmmm. the Harvey Norman approach to capital markets presentation techniques. Once the cost of capital or opportunity costs are factored in the issue will have to sell on it's merits - which are nil given that the model for accounting for profit, return on inflated assets, is not fit for purpose - this is clearly implied in MRP's current price.
Be warned - some people never learn - a salutary lesson
Everything is fine and dandy - so long as the share price of the first tranche stays above or near its issue price
Here is the case of installments that went wrong
Brisconnections shareholders facing financial ruin
Brisconnections was a $3.5 billion company floated in July after winning the contract to build a toll road in Brisbane, a deal brokered by Macquarie Bank. Shares were issued at $3 each, to be paid in three instalments of $1. But when the share price of Brisconnections plummeted in 2009 to just a mere one tenth of a cent, bargain hunters moved in and bought millions of the shares not realising there were outstanding obligations. Now, they face bills running into millions of dollars when the next dollar per share payment falls due in April 2009, with another to follow in 2010
That was an interesting exercise in how not to get sucked in. They opened at the $1 issue price or slightly below. They were paying a 10% dividend or 5 cents every 6 months. When the price got down to 1 cent it looked like money for jam. Outlay 1 cent purchase to get 5 cents return. I almost bought 1,000,000 shares at $0.01 for $10,000 to get $50,000 in dividends. It was too good to be true. But they woke up to that and cancelled the dividends altogether, and the price of the shares collapsed to $0.001. I almost got sucked in. Luckily I didn't, only because the share price never once showed any signs of stabilising. It was a never-ending one-way-down-hill.
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