Forum Archive Index - August 2001

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi RIL, 
>
>
> A 300 mio loss and no one has anything to say about
> it.
> 
> Why was Transalta bought? Why were the correct
> forecasts on electicity prices not made? Why were the
> price movements not hedged? Who is responsible? 
> 
> Do you no longer care about your money?
> 
> 
As a former shareholder in Tranalta "I care" RIL, which is why I 
accepted the Natural Gas cash offer rather than the share swap offer. 
 
Your post made me take a peek at my 'library of shame'.   This 
collection of dubious literature includes the outrageously optimistic 
Frucor prospectus, an Equitycorpse Annual report from the time just 
before they went belly up, and (surprise, surprise) the Grant Samuel 
and Associates valuation of Transalta, at the time of the NGC 
takeover offer.

I quote from section 5.1:

"NGC has offered $2.79 cash for each Transalta share.  The NGC offer 
is *above the valuation range* and accordingly the terms and 
conditions are fair to the holders of Transalta ordinary shares not 
associated with NGC" 

By implication this reads the offer was *not* a good deal for NGC 
shareholders (the buyers).

Then from 5.2.1

"However the assessment of the the NGC offer is concerned with the 
realisable value of NGC shares immediately after the transaction.  
*The decision to hold NGC shares is a separate investment decision to 
be made by shareholders.*"

IMHO this was a gross abdication of responsibility by Grant Samuel.  
They were approaching the merger with the idea that people getting 
NGC shares that it was not their responsibility to give any 
indication on the outlook for their new investment.

Grant Samuel stated:

"The NGC share price in effect represents a reasonable assessment of 
value by a well informed market.  The NGC share price in effect 
represents the consensus view of analysts and investors that follow 
and scrutinise the company.  There is no basis for believing that an 
individual external assessment of value would provide any more 
reliable guide to the value of NGC shares than is provided by the 
market price."

Which IMHO was the ultimate cop out.  Subsequent events have shown 
that these 'analysts' actually had no idea how the NZ electricity 
industry works, and that relying on the 'the market only' to be 
able to provide an effective on-going evaluation of NGCs 
future prospects was a very bad decision.

What is even more aggrevating reading this report again is this 
comment under section 3.8.3:

"Retailers with a higher level of own generation, i.e. Contact 
Energy, have a lower risk profile than Transalta and are 
potentially in a better position to discount prices to attract new 
customers.  It is also conceivable that generators will not bid 
surplus capacity into the NZEM (which is optional) in an attempt to 
increase spot prices to disadvantage retailers such as Transalta."

...which is exactly what happened!  So it would seem that Grant 
Samuel did indeed have a good grip on what might happen, yet chose 
*not* to emphasise the point!  

To anyone who actually read the report between the lines, in detail, 
the meaning was clear.  If you want to invest in the electricity 
industry sell NGC and buy CEN.  If you compare the share prices of 
each at the time of the offer and today NGC (~$1.50, now $1) and CEN 
(~$2.60 now $3.30) you will see that the Grant Samuel advice was spot 
on.  Fortunately for me, I followed this advice.

Pity Grant Samuel didn't emphasise that point to the hapless 
Transalta shareholders who swapped their shares for NGC shares 
though. SNOOPY

disclosure: ex-Transalta, now CEN shareholder.






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