Forum Archive Index - April 2004

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

Contact Energy is the fifth 'arm' of my income portfolio.  It doesn't get 
discussed much on this forum which is surprising given that at one 
point more New Zealanders held shares in Contact Energy than any 
other company.     So how to value it?    The short answer is 'with 
difficulty'.   CEN is a simple (sic) energy business but in this case that 
means:

1/ An electricity generator and wholesaler
2/ An electricity retailer.
3/ A natural gas retailer.

One of the best ways to learn how to value a business is to get hold of 
a Grant Samuel and Associates appraisal report on it.    These reports 
are rare as they are only issued in times of a takeover or perhaps a 
move by the existing controlling shareholder.   In mid 2001 Edison 
Mission Energy, 40% shareholder of Contact, gave notice that they 
wanted to increase their stake.   The conclusion of the Grant Samuel 
Appraisal report on the Edison bid at between $2.90 and $3.25 per 
share was as follows:

"The terms of the proposed Restricted Transfer are fair in so far as the 
price received by those shareholders who sell to EME is likely to equal 
or exceed the fair market value of a portfolio interest in Contact 
Energy."     Translation:   'Shareholders who sell on market to EME will 
get market price'.   Hmmm, well I don't need a highly paid consultant to 
tell me that!

However, a rider in the recommendation of the independent director's 
covering letter is telling:

"Opinions as to value can differ significantly with reference to the key 
influences on Contact's value.  In particular these include views 
regarding the likely future price of wholesale electricity and what is an 
appropriate rate of return on the capital invested in the company's 
business relative to the market as a whole."

Clearly with hindsight those who sold out around the $3 mark have 
missed out on approximately an 80% gain in the last three years and 
would be feeling fairly foolish.  It is clear to me that a good 
understanding of the wholesale electricity market and given recent 
asset revaluations, appropriate rates of return, are critical in valuing 
Contact Energy.   That is what I plan to spend some time looking at.

Please feel free to join in.

SNOOPY

--
Message sent by Snoopy 
on Pegasus Mail version 4.02
----------------------------------
"Sometimes to see the wood from the trees, 
you have to cut down all the trees."




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