By David Hargreaves
The Government's hard-sell of Meridian Energy has started, with 49% of the SOE to be offered to the public later this month ahead of an expected sharemarket listing on October 29.
The marketing starts today in what can expected to be pretty full on, heavy duty, selling, given some of the difficulties the offer could potentially face getting off the ground.
The Government has released a "next steps" document, outlining proposals and the planned timetable.
Not least of the Government's problems in attracting potential buyers is the fact that Mighty River Power shares, floated in May and raising $1.7 billion for the Government, are currently languishing at just $2.18 compared with their issue price of $2.50.
While the public were initially very keen on the MRP shares - with 440,000 pre-registering interest - just 113,000 eventually fronted up to buy them.
MRP dogged
The latter stages of the MRP float and its subsequent listing have been dogged by, firstly the release of a Labour/Greens policy proposing drastic overhaul of the electricity market and secondly by the uncertainty over the future of the Tiwai Pt aluminium smelter, which consumes around 13% to 14% of all New Zealand's electricity.
But the Government's already previously indicated it will be pulling out all the stops for Meridian - the biggest SOE power company - by offering a deferred payment scheme and by ramping up the dividends buyers may get. See here for articles on the partial privatisation programme.
The Australian Financial Review's influential Street Talk column, which has been consistently leaked details of first the MRP offer and now Meridian, was saying last week that Meridian might be offered at a price that gives an underlying dividend yield of about 7%.
However, the nature of the deferred payment, with investors paying 60% of the price initially and then the other 40% in 18 months will give an initial yield of something like 12% to 13%.
Big carrots
Even given such a considerable carrot, estimates of perhaps $2 billion or even less are now being bandied around for what the Government might raise in total from the Meridian float - against earlier forecasts of perhaps over $3 billion.
There is increasing speculation the Government may have to revisit its target of raising between $5 billion and $7 billion from its partial privatisation programme.
The Government says full details of the Meridian offer will be set out when the offer document is lodged on Friday.
Finance Minister Bill English and State-owned Enterprises Minister Tony Ryall said pre-offer marketing would start this evening, "ensuring New Zealanders are aware of the Meridian offer through television, newspaper and online advertising".
Genesis, Air NZ
The ministers also confirmed they were considering options for Genesis Energy and Air New Zealand – two of the other companies in the Government’s share offer programme.
“As the Prime Minister [John Key] said last month, we anticipate that the Genesis Energy share offer will occur in the first half of 2014, subject to market conditions,” Ryall said.
“Preliminary work is underway and will continue over the next few months.”
The Air New Zealand share offer would be different to the others, as it is already a sharemarket-listed company, with the Government holding about 73%.
“What that means is that New Zealanders can buy shares in the company now, if they wish,” Mr Ryall says.
Working it out
“We are currently working through the best way the sell down can occur and we remain keen to ensure that New Zealanders have the opportunity to participate in it. At this stage, no final decisions have been made, including on timing. However, when it occurs we expect it will be a shorter process than that used for Meridian and Mighty River Power.”
- The Meridian offer document will be lodged this Friday, September 20, setting out all the information investors need to make an informed decision about whether to invest. This will include the price range, the price of the first instalment, the capped price of the second instalment and the expected yield.
- After the offer document is lodged, the Financial Markets Authority has around five business days to review the document. This ‘consideration period’ is expected to conclude on September 27.
- New Zealanders will then have three weeks from September 30 to consider the offer document and apply for shares before the general offer closes on October 18. This will be followed by a book-build process where institutions bid for shares.
- It is expected that Meridian will list on the New Zealand and Australian sharemarkets on October 29.
Ryall reiterated that the offer process put New Zealanders at the front of the queue for shares and "will ensure they have easy access to information".
Retail syndicate
“To help achieve this, a retail syndicate will be marketing the offer to New Zealanders, and they will offer information and advice to their clients.
"In addition, we have included what is called a ‘broker firm’ aspect to the Meridian offer. Under this arrangement, brokers assess demand from their clients and submit bids, and the Government then chooses how much to allocate them.
“Just like the retail offer, this process is open only to New Zealanders and is consistent with our commitment to ensuring 85-90 per cent New Zealand ownership of the shares,” Ryall said.
32 Comments
Mighty River was a good lisitng to take a punt on (for the long run ).
Meridian is not so good ,they supply a significant proportion of their production to a doomed Aluminium smelter, that can never compete with Chinese smelters , or even Australian and South African smelters , and that inlcudes BHP's Mozambican smelter .
This one is not going to end well for Mom and Pop investors
Hello Boatman, I'm new here, but by your opening statement I'd say you don't invest in shares on a regular basis.
So a great long punt involves losing a great portion of your investment from the get go ?
Then waiting out the never never to claw back your stake money ?
Obviously I'm a little flaberghasted to see anyone put that up, just shaking my head as it was always overpriced.
Yep, he needs a wake up call.
The froth is back. As we noted yesterday, corporate leverage has never been higher - higher now than when the Fed warned of froth, and as the BIS (following their "party's over" rant 3 months ago) former chief economist now warns, "this looks like to me like 2007 all over again, but even worse." The share of "leveraged loans" or extreme forms of credit risk, used by the poorest corporate borrowers, has soared to an all-time high of 45% - 10 percentage points higher than at the peak of the crisis in 2007.
As The Telegraph reports, ex-BIS Chief Economist William White exclaims, "All the previous imbalances are still there. Total public and private debt levels are 30pc higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle."
Crucially, the BIS warns, nobody knows how far global borrowing costs will rise as the Fed tightens or “how disorderly the process might be... the challenge is to be prepared." This means, in their view, "avoiding the tempatation to believe the market will remain liquid under stress - the illusion of liquidity." Read more
He's right and he's wrong. If you bought at the IPO; right now you'd be shaking your head. The difference between the IPO price and the current price is the Labour/Greens threats to nationalise the industry. If you bought now however your essentially betting that National will win the next election and if it does then there's no reason the share price wont go back up to IPO price and above.
Meridian will be a dud, far too much uncertainty, unless they price it very cheap to include the loss of Tiwai.
As I remember the timeline, shares were offered, the Labou/Greens Policy was announced, then people had the opportunity not to buy. Yep, just checked: Mid- April Labour/Greens policy announced, April 22nd New Mighty River prospectus details impact of Greens/Labour policy. 8th May final price set.
This was all known before the final price was set, people could have priced it in.
The IPO price was set with the assumption that nationalisation would not happen, the IPO price is a fair value - liquidity premium. The difference between the IPO price and the current value can only be reasonably explained by the Labour/Greens proposed policy and the uncertainty it's created.
Shame the State failed to take that which you mention into account when they gave permission to accept the determined IPO price. But then those that did not participate would have been ripped off.
It would have been a better deal for all if nothing had transpired until an equitable balance between debt financed dividends and energy price hikes had been established.
The buying of the IPO was made after the announcement of possible market regulation.
An alternative explanation is the share finding a natural level for what the wider market thinks of as a utility without massive growth potential sort of P/E (and the judgement of the wider market being different to the early enthusiasts) and that all parties have priced in possible regulation.
For your theory, that the Labour/Greens policy (and so National being the next government) are the major force driving the share price slide, we should expect to see that the share price should move in a similar pattern to National's popularity. While both have shown a downward path (National by a little, MRP by much more) the ups and downs along the way are not a great match.
This is something that should become clearer over time, if MRP finds a natural level, and support for National decreases along it's long term trend line.
Given Labour has a better than 50/50 chance of winning next year and then regulating the SOE's to get the domestic price down (Greens will push hard) a punter buying in would be crazy to go near the power companies IMHO....or someone who buys very cheap on the gamble National wil win.
Of course then we have the PPTA and a Govn "destroying" the value of a share might find themselves in court.....
Just watch us get screwed over....
regards
There is much more to it than that
The MRP float priced at 27 x times earnings was stratospheric dot.com.boom Google Facebook territory whereas pricing for a utility should be around 15 x times earnings. I can almost guarantee the government leant very heavily on the float managers and assorted beholden institutions to obtain and support that pricing.
With the upcoming Meridian float the government will turn once again to those same participants to get the float away.
Ordinarily those institutions who will be expected to support the new float would sell out of MRP in order to take up the new requirements in the new float.
And therein lies the problem. If they sell down MRP to free up capital to take up the new share offering, the share price of MRP will suffer
Unfortunately those institutions are carrying a substantial overhang of MRP shares together with attendant losses. They sure as heck are not going to make the same mistake this time around. Unless there are some back-door incentives
The float price of Meridian will be more in keeping with 15 x times earnings and MRP will be adjusted into line by the arbitrageurs. Guaranteed.
Back in April I said a good buying price for MRP would be $1.80
The float price of Meridian will be more in keeping with 15 x times earnings and MRP will be adjusted into line by the arbitrageurs. Guaranteed.
Yup and back door incentives, given JK's record on these things, are highly likely as well.
The buy-now-pay-later scheme is only the first salvo from a desperate government.
@Steven, If anyone thinks a Labour Govt. can reduce electricity prices, they best think again.
Any future government WILL:-
1) Be delighted to take the Corporate Income Tax on MRP profits ( they dont need shares to do this )
2) Take the dividend withholding tax from shareholders
3) Not do anything to reduce the profitability of something they own a controlling 51% stake in. Think of guns and feet and geese with gold eggs
4) Not damage the income stream of the NZ Super fund which is the biggest investor on the NZX
4) Not buy the shares back largely because they could not afford to do so without resorting to borrowing , and the Government already has too much debt.
5) And , if they enter the market to buy them up with borrowed money , the price would rocket .
HC and co certainly did collect the "tax" however this time around the Greens are 15% of the vote, plus there are a lot of ppl complaining, that is a vote winner/loser IMHO....
You have 2, 4s, 2nd, I dont think they need to buy them back, its actually quite simple you destroy the share price by regulating them to the point there is no profit and buy them back at cents on the $....if you want to that is....I'd leave them "private" myself.
I mean just look at the P/E ratio 27:1? I wouldnt buy shares above 8 to 1 myself....turn that to 50 or 60 to 1 with regulation, bye bye share price.
Oh and you are in property. So Im curious what is your startegy to survive an incoming Labour Govn? A CGT will come, either in 2014 or 2017 and it seems your portfolio is vunerable to Govn actions....ie a single event a chnage of Govn and you take a hammering?
Its going to be interesting watching the polls and wondering if Labour get clearly ahead next year whether lots of landlords will exit....
regards
If you want a steady dividend income stream , then Meridian may be just the stock for you ..... provided you don't pay Mighty River IPO multiples for it ...
.. these SOE's are low growth companies .... don't pay growth stock PE's for them !
No one is twisting anyone's arm to buy these .... there are plenty of exisitng companies on the NZX to choose from , instead ... their prices and performances are already public knowledge ....
... and if a Green-Labour government decide to nationalise your shares , in a year or four , they're unlikely to give you less than the current market price .... they're not silly enough to anger 100's of thousands of voter/shareholders ... so you got a safety back-stop there ....
Gummy - The labour/greens don't need to buy the shares back. They just need to ensure the power price is a true market and let electricity prices fall back to a non monopoly level. Probably about 40% of the current price. That will leave the shareholders unhappy, And their shares highly devalued, but they have very few votes compared with the millions made very happy.
disclaimer: I don't think their proposed market plan is viable. But they can do much better if they really think market.
Possibly we would be expected to pay much more Gummy, for the specious reason that revenue lost at Tiwai needed to be made up.
The way I see these non markets working Gummy, is that even if Tiwai went off line, and even if there was a vast amount of spare electricity just wanting to be used - prices would not drop.
Crony capitalism is a powerful (cough) beastie. But it must be tamed.
RIO-Tinto , the $US 117 billion resources behemoth are not paying market price for that electricity .... they're getting the mother-of-all discounts on it ...
... throw that extra power into the grid , and the revenue will be made up lickety-splick ...
It's one thing to throw a bone to the poor street urchins running our America's Cup challenge , quite another to give in to the demands of a monster multi-national company ...
RIO are past masters at playing the political game, all around the world - nz is just the Hors D'Oeuvre - RIO has a 15 year fixed contract with the Victorian Government - paying a mere $0.03 cents per kw/h - with the threat "if you increase the rate" we will close the smelters and chuck the jobs - a threat that keeps governments in line
And the estimate I've seen is that site remediation costs would run to around $400m - how the heck any NZ government would enforce that contract is beyond me. What was it the Meridian CEO said at the SC meeting .. 'we aren't dealing with grandma.." (or something to that effect).
GBH , I also dont understand the rationale behind the Rio smelter deal.
That smelter is a blight on the landscape, its losing money and cannot compete with Chinese smelters , its probably in need of Capex , and its a waste of energy for us to sell electricity at those prices .
The only explanation(s) can be that it props up Meridian and saves the smelter workers jobs .
Yes Mr Boatman , the ginormous Chinese smelters dominate the industry , and the Aussie & Kiwi ones are on borrowed time ....
... so all Jolly Kid has done is to forestall the inevitable shut-down of the Bluff smelter .... just long enough to get the Meridian float completed ...
Poor form , JK , seriously poor form old chap !
@Happy 123 , I disagree with some of your asserions . You are correct about there being other better investments on the NZX , but what about portfolio diversification?
I already have POT , Akl Airport , all the listed property counters such as Kiwi Income , Goodmans , etc .
I have some Telecom , Fletchers and the bigger retailers , but they are terrible mercurial performers .
MRP is a good long term punt in a hard-asset based business.
I think you are wrong about Auckland housing , its a dreadful investment , the yields before tax are atrocious , the hassles are unmentionable, and the prices have gone too far for me .
Some to consider, all on NZX:
ANZ - good upward trend in the short term and long term they have huge scope to reduce costs following the National merger.
SLI - bit of a gamble but the only share on the NZX IMHO that could double in value before Christmas. Think Xero 4 years ago.
FCG (Fonterra) - low at present due to the scandle, long term prospects are almost guaranteed.
SCK (Sky City) - currently trading at the bottom range of their long term average also strong position in the market with good future potential in the convention deal.
FYI , To all the naysayers, I did buy MRP but only a small allocation , and have subsequently bought more .
The fall in the MRP share price coincided with hiccups on International Markets as a result of the expectation of Tapering of the QE , and has nothing to do with the Quality of MRP as a Company
The counter is and remains a good one.
The Company supplies an essential.
It has really good quality unimpaired assets.
It has very low debt in relation to asset replacement cost .
The expected dividend after tax is better than the Bank.
For shareholders it will be as good as Ports Of Tauranga and Auckland Airport in the long run.
I did buy MRP but only a small allocation , and have subsequently bought more .
Ooops, doubling down should be a prohibited investment practice - I hope the day job pays well. You need to learn that money lost is not easily recovered by repeating the first mistake.
Absolute twonk , Hulmey ! .... if you paid full price your the tin of baked beans at the supermarket yesterday , and you see that they're half price today .... do you buy a few more today at the lower price .... or do you wait for next week when they're back to full price , then purchase more , to vindicate your first purchase ?
... if you thought they were good value at the first price , surely they're even better when the price has come down ..
Are you confusing " price " with " value " ?
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