Forum Archive Index - November 2001

["Colin Ross" <ceejaynz@xtra.co.nz>]

Simply to add another perspective to the discussion....

Be aware that  UK & USA for two, are very heavily into nuclear power.

Reactors need to operate on a steady base load they cannot be switched off
and on like ( particularly) a hydro source.

Accordingly, there are large surpluses of power available at unsociable
hours - probably need to be sold at loss-leader prices.

These conditions could have an effect on overall profitability/ share values
of such Companies.

Ceejay



----- Original Message -----
From: <tennyson@caverock.net.nz>
To: <sharechat@sharechat.co.nz>
Sent: Monday, November 12, 2001 11:41 AM
Subject: Re: [sharechat] CEN takeover bid


> Hi Sue,
>
> >
> > Any opinions?
> >
>
> I've been doing a lot of reading over the weekend.  There is a lot of
> information in that white paperback that arrived on Friday!
>
> One thing that is clear to me. Of all the energy companies about,
> Contact is one of the best.
>
> Before last winter, because overall New Zealand is expected to have a
> surplus of power until 2010, I would have said that being a net
> retailer, rather than a net generator, was best.  After all, if
> there is a surplus of power just wait until it gets cheap, and buy to
> make up the shortfall!  What wasn't clear was that one bad hydro
> year could completely wreck a net retailer, as 'Transalta'/'On
> Energy' found to its cost.  Long term, a power generator/retailer is
> going to struggle in this New Zealand market when there is a dry cold
> winter, unless you are a net generator.  Contact is the *only* listed
> net generator in this country.
>
> On page 37 of the Grant Samuel Report, there is a table "Listed
> Energy Companies- Sharemarket Ratings".  This shows that the EME
> offer values Contact Energy at below the EBITDA multiples of
> Trustpower and NGC on today's market.  Surely Contact is a better bet
> than these two?   So why is the EME offer so low?  'Grant Samuel'
> argue that the share price of both NGC and Trustpower is too high.
> Surely this argument is churlish?  As I see it if you make a bid
> for a company on the market you should pay market price.  Not
> claim the market is too high, so you should pay a lower price!
> If you look down the same table there is a pathetic comparison given
> with EBITDA valuations of similar companies in the UK and USA.  The
> implication being that if Contact was in the USA or UK then it would
> be worth less, so EME should pay less.   Have you spotted the tiny
> flaw in this Grant Samuel argument?
>
> Contact Energy is (gasp) a *New Zealand* company!   It isn't in the
> UK or USA!  Contact has the benefit of a very cheap supply of natural
> gas and hydro dam reserves.  So why on earth would you expect Contact
> to be priced the same way as some old world coal burner?  Contact and
> all the other New Zealand power companies should,  and do,  trade at
> a premium to all those US and UK power concerns.   Generating power
> is something that New Zealand does very well.  If EME want my
> Contact shares they are going to have to pay a *New Zealand* premium
> for them!
>
> I notice 'Grant Samuel' has valued Contact by using a discounted cash
> flow analysis.  Nothing wrong with that, except that the results can
> be very sensitive to the assumptions made, and some of those
> assumptions, I think, are dubious.  I'll run a few numbers on the
> focus investment board so you can see what I mean.  But to quote from
> the 'Grant Samuel' report on page 36:
> "While they (industry rules) are only used as a cross check in most
> cases, industry rules of thumb can be the primary basis on which
> buyers determine prices in some industries.  In any event, it must be
> recognised that rules of thumb are usually relatively crude and prone
> to misinterpretation."
>
> It looks like Contact shareholders owe a great debt to Bill Birch who
> struck such a favourable price deal for them in 1975.  Paying only
> $2.00-$3.80 per Gigajoule for Natural Gas, where companies
> equivalent companies in the UK and USA pay twice to three times that
> price is obviously hugely beneficial for Contact.  Will Contact
> continue to enjoy this benefit after the Maui gas field expires?  It
> is difficult to say, but 'Grant Samuel' thinks $4.50/GJ might be
> realistic.   Too optimistic?
>
> I am slightly annoyed by there being almost no reference to per share
> earnings in the 'Grant Samuel' analysis.  Lest you have forgotten,
> Contact bought back 4.5% of its own shares last year.  This means the
> per share revenues figures for 2001 and future years are some 5%
> better than the bare 'total revenue' and 'net surplus after tax'
> figures indicate.
>
> One last niggle.  EME does not have the finance package in place to
> complete the takeover.  'Grant Samuel' comments that this is very
> unusual.  'Grant Samuel' further states that the reason for the full
> takeover offer, rather than just a creeping 5% of shares per year
> takeover by stealth, which is allowed, is that EME wants to get their
> hands on Contact's cash flows.  The implication here is that EME
> wants to strip as much cash as they can from 'Contact' for their own
> ends.  Possibly, they may borrow against Contact's own assets to
> finance a heavily leverage takeover!  This sounds suspiciously like
> what a couple of cornerstone American shareholders did to Telecom NZ,
> leaving it desperately short of cash for any future growth.  A good
> move for the shareholders to be sure, but not very good for NZ.
>
> So as you might gather, this ol' hound dog won't be rushing out to
> accept the current cash offer from EME, whatever bullying letters
> arrive in the mail in the next few weeks.   And the fact that I have
> taken the opposite view on my shares to what Independent directors
> Messers Phil Pryke and Co. intend to do with theirs, leads me to
> believe I have made the right decision ;-).
>
> >
> >Do you think EM will get 90%?
> >The Independent says a 10% bloc of institutional
> >investors plan to turn it down.
> >
>
> That is very good news.  A 10% block will be enough to block the
> takeover.  And to that 10%, you can add Snoopy's small holding.
>
> SNOOPY
>
> (disclosure: hold CEN)
>
>
>
> ---------------------------------
> Message sent by Snoopy
> e-mail  tennyson@caverock.net.nz
> on Pegasus Mail version 2.55
> ----------------------------------
> "You can tell me I'm wrong twice,
> but that still only makes me wrong once."
>
>
> --------------------------------------------------------------------------
--
> To remove yourself from this list, please use the form at
> http://www.sharechat.co.nz/chat/forum/



----------------------------------------------------------------------------
To remove yourself from this list, please use the form at
http://www.sharechat.co.nz/chat/forum/