MERIDIAN UNBUNDLED

Thursday 24th October 2013 1 Comment

The Meridian offer has closed and the allocation process has been agreed.

As usual politicians are arguing over what we should read into this.

Our analysis is as follows:

- The Issue was oversubscribed and there will be scaling and funds will be returned to investors.

- There where approx. 62,000 applications made (Mighty River Power 113,000) (Note: No one knows how many multiple applications were made).

- Shareholder numbers will reduce in both. The share registries are Smaller shareholders are generally sellers. Larger parties (institutions) will be buyers).

- All pools are scaled even the “Firm “Broker Pool (by 10%).

- The scaling on the PUBLIC POOL is progressive i.e.

None on first $2500

10% on next $7500

15% on next $5000

25% on next $5000

45% on the amount over $20,000

So a person paying $25000 for the equal number of shares, now gets 20,000 shares through the public pool.

2500 x 100% = 2500

7500 x 90% = 6750

5000 x 85% = 4250

5000 x 75% = 3750

5000 x 55% = 2750

Total =20000

- The price is $1.50 and it is at the lower end of the scale ($1.50 to $1.80).

- The price gives a P/E of Trailing Forecast(2014) Forecast(2015)

Based on $1.50 13.04 20.55 18.29

- An EPS of 11.3c 7.3c 8.3c

- The price compares with a valuation range included in 4 separate valuations of $1.25 to $2.79c.

- The ONLY valuation below the issue price was based on a change of Government to a Labour /Green Government and policy changes being made. All other showed a price above $1.50 (highest $2.79).

Issues

Over-hang from partly paid.

- The market effectively has a liability of $600million in 18 months.

This does not look like an issue in today’s market; however in a tighter market this could be significant.

Change of Government

If the policy announced by Labour/Greens is implemented it will adversely affect Meridian.

We believe it is appropriate that all parties announce well in advance any policy that will affect any investment e.g. listed share, Kiwisaver etc.

It would seem destructive to bring in a policy which hurts companies (3 0r 4) which the Government owns 51% or more of. If it occurred the Government would be writing off very significant amounts off its assets base.

Has the Government done well?

- Yes it has progressed the policy.

- Yes it has raised significant cash.

- Yes it has increased the number of shares listed in NZ and the Market size of the NZX.

- Yes it has created better commercial pressures on an SOE i.e. it will be more accountable (hard to reduce staff if you are 100% Government owned).

- No because the price is “average “.

- No because it has created an overhang for 18 months.

- No because it will make it hard to get the total asset sales target.

- No because it has not “sold “the benefits of the transaction to the public.

Performance Post issue

We expect the following

- Less initial trades than MRP.

- Less price volatility.

- More investor support.

- More buying for dividend.

- Less traders looking to sell.

In summary a more orderly market with more strength than MRP.

For Further Information or Comment

Contact

Brent King

Managing Director

Investment Research Group Ltd

64-21-632-660-Brent.king@IRG.co.nz

Comments from our readers

On 24 October 2013 at 8:43 pm Max Lewis said:

Your analysis comment: "No because it has not “sold “the benefits of the transaction to the public" is so correct, in fact this National Government's greatest failure is their ineptness at "selling" their strategies to the general public, and if they don't get their act together and educate the public on the benefits of their policies they risk forfeiting the 2014 election. Max Lewis. Mt Maunganui.