Financial fairydust coats Powerco share sale

By Shoeshine

Friday 13th August 2004

In war, the old cliché goes, truth is the first casualty. And few ideological battlegrounds are as blood-soaked as the one on which public ownership diehards slug it out with free marketeers.

So it was only to be expected a few public relations atrocities would be committed in the fight to get Powerco's effective privatisation past the Taranaki populace. Observers have not been disappointed.

Fishy aromas arise from a whole swag of arguments the sellers New Plymouth District Council, Taranaki Electricity Trust, and Powerco Wanganui Trust deployed to mute opposition.

First up, and Shoeshine's personal favourite, is the price.

The council, advised by PricewaterhouseCoopers, softened up voters by telling them they could expect a 25%-plus premium on "the share price prior to the takeover announcement."

Exactly what date that indicates in Powerco's case is open to debate, but suggesting, as the sellers have sought to do, that they got anywhere near a premium of that size is simply preposterous.

The $2.15 paid by Prime Infrastructure Group was, the press releases assured, a 21.5% premium over the dividend-adjusted average market price over the 12 months preceding the sale announcement and a 27.2% premium over the price on August 1 last year.

So what? Those figures are utterly irrelevant. Who cares what the price was a year ago? Prime is buying now.

The real question is: what would Powerco shares have been worth now if the selling trio hadn't put their stakes up for sale?

On April 29, six days before the shares went on the block, Powerco closed at $2.12, just 3c below the price the trio have taken.

The NZSX50 index has since risen 4.35%. If Powerco had risen by the same amount the price would be $2.21.

Prime's price is 10% above First New Zealand Capital's Powerco valuation of $1.96 and 2% above the broker's 12-month target of $2.10.

ABN Amro's discounted cash flow valuation is $1.93.

A hefty handful of financial fairydust has also been sprinkled over the matter of part payment in "debt securities."

The council and the trusts are each taking only 62.5% of the sale proceeds in cash and 37.5% in unsecured, subordinated debt securities (Sparcs) issued by Prime.

In effect the sale has been expedited by vendor finance that is, lending somebody the money to buy your assets rarely an indicator that the sale was closely contested by well-heeled rival buyers.

The line here is that the council and the trusts asked Prime to create and make part-payment in these securities.

Really? How odd.

One of the council's principal justifications for selling was that it ought to have its ratepayers' investment in a prudently diversified portfolio, not just in one company's shares.

Its investment options are almost endless. For example, it could buy risk-free, highly liquid government stock admittedly at a much lower yield than Prime is offering.

But no. It opts instead to put more than a third of its capital, some $97 million, in a single, probably highly illiquid junk instrument.

What sane financial adviser would recommend that?

More fishy fragrances emanate from the council's insistence it had to sell because of Powerco's tax position.

The council doesn't pay tax on investment income, and Powerco doesn't pay company tax at present .

The council received $19.3 million in Powerco dividends last year. If Powerco moves to tax-paying status as PWC advised it will then a third of its payments, or $6.4 million of last year's payout, will in future be made in the form of imputation credits that are valueless to a non-taxpayer.

The council's use of this argument as a rationale for selling obliged Powerco this week to repeat statements made at the July 27 annual meeting. It said then it would not become a cash taxpayer until the 2010 financial year six years away.

That date would have been two to three years later still but for the sale by the council and trusts. Under tax rules, the break in continuity of ownership of at least 50.1% of the company's shares has cost Powerco available tax losses that would have sheltered income for that period.

So any impression of an urgency to sell for tax reasons is entirely bogus.

The council in fact ran this argument in tandem with a completely different one. This was that the revelation that Powerco was in discussions with NGC made it imperative for the council to put its shares up for sale.

"If we sell before the merger [sic] we stand to gain a good premium ... selling after a merger could greatly reduce the premium. In fact, we might have to sell at a discount," it claimed.

That's at least arguable. But all Powerco's mergers and acquisitions to date have created shareholder value. Given the total lack of information on what might result from the NGC talks, there can be no compelling argument that the council would be a loser.

And what are Taranaki voters to make of the "sure not to rise" clause in the sale contract that forbids Prime to offer a higher price for outstanding Powerco shares for one year after the mop-up takeover offer?

Sceptics will suspect it serves no purpose other than to ensure the sellers aren't shown up as having sold too cheaply.

That's not to say none of the minorities will accept.

ABN Amro says Powerco is fully valued at Prime's price and recommends shareholders accept "preferably in cash."

First NZ says the offer, on the known facts, "is not striking us as enormously attractive," but much depends on the recommendations of Powerco's directors.

The majority of these, it's worth noting, will be out of a job when Prime takes over in October.

Given the part-settlement in junk debt, their advice will be keenly awaited.

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