Meridian IPO inducements may attract retail investors

Tuesday 20th August 2013

Government inducements to buy into Meridian Energy's float via two payments and a price cap for retail investors are likely to attract kiwis spooked by the dismal market performance of MightyRiverPower, brokers and fund managers say.

Prime Minister John Key, flanked by Finance Minister Bill English and SOE Minister Tony Ryall, today announced plans to sell Meridian in two instalment receipts, with investors paying 60 percent up front and the remainder 18 months later, after receiving dividend payments. The government expects the power company will list in early November.

On top of that, New Zealand retail investors will know the most they will pay for the shares, which could be less than what institutions end up paying.

"We were very pleased with the announced structure that came out," said Grant Williamson, director at Hamilton Hindin Greene in Christchurch. "You're going to get an enhanced yield for your initial subscription to the shares, and the retail price cap is very positive as well."

"We just need to make sure new investors take a medium to long term view on Meridian," he said. "Too many people got into MRP taking a short-term view."

Meridian is the second of four SOEs plus Air New Zealand that are slated for sell down under a government policy to raise as much as $7 billion to repay debt and seed its Future Investment Fund to help fund schools, hospitals and transport infrastructure such as KiwiRail.

The power company was last independently valued in 2011, at $6.5 billion, suggesting its value now may be around $6 billion and could yield around $3 billion in a 49 percent float. That makes it the jumbo new listing for the NZX and on the market operator's estimate would generate $450,000 in annual fees.

Matt Goodson, managing director at Salt Funds Management, said the instalment receipts will help the sale by reducing how much investors have to stump up in what will be a "large float" and also by making the return on investment more attractive.

That deferred payment scheme works both ways and if Meridian misses expectations the return will become less attractive as investors "are still on the hook" to make good on their payment, Goodson said.

The government's determination to push the sale forward may have influenced its decision to provide a $30 million subsidy to the Tiwai Point aluminium smelter, owned by Rio Tinto and Sumitomo, and Meridian's biggest customer, in exchange for keeping the plant open at least three more years.

Ryall told reporters in Wellington the government considered repeating the bonus share offer it used in the MightyRiverPower float or discounting the sale, but settled on the instalment receipts, which effectively mean the government bears the finance cost of a deferred payment.

Shane Solly, portfolio manager at Mint Asset Management, said the instalment receipt process has been successful in Australia, where it was used to privatise Queensland Rail, and offers more flexibility for investors.

Genesis Power is most likely to be next out of the blocks with a sale next year. Air New Zealand could follow, though coal miner Solid Energy is being restructured to return it to profitability before it will be considered.

ANZ New Zealand, ASB and Forsyth Barr have been hired for the retail syndicate part of the sale. They will work with the joint lead managers, Craigs Investment Partners/Deutsche Bank, JBWere/Goldman Sachs and Macquarie Group, the Treasury said in a separate statement.

BusinessDesk.co.nz

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