Taranaki dreaming over Powerco stake

By Shoeshine

Friday 7th May 2004

Whoever is supplying public relations advice to New Plymouth District Council should identify themselves to Shoeshine.

Seldom has he seen such a masterly document as mayor Peter Tennent's press release explaining its decision to put its Powerco shareholding up for sale.

How the Taranaki peasantry is taking the proposed flog-off of the community crown jewels has yet to be reported.

The council has 38.12% of the (formerly) local power and gas lines company, and Taranaki Electricity Trust, with 11.79%, has also put its stake on the block.

Shoeshine hears Powerco's and NGC Holdings' managements reacted with astonishment to the share sale announcement.

Mayor Tennent's argument is that merger talks between Powerco and NGC, with Auckland lines company Vector thrown in at the periphery, creates a window of opportunity for the council to "maximise its Powerco investment by selling its shares now."

"The landscape is changing and things are getting a bit hot for us," mayor Tennent enigmatically argues.

"So it's time to move on ... if we sell before the merger we stand to gain a good premium ... selling after a merger could greatly reduce the premium. In fact, we could well have to sell at a discount."

That's possibly as much high finance as Taranaki voters can absorb, but the situation, as Alice might say, is much curiouser than that.

The council is being advised by PWC Corporate Finance, an outfit that, while eminent, doesn't do a lot of mergers and acquisitions work in the utilities sector.

It was presumably PWC that told the council that "in recent examples of such takeover positions, buyers have paid an average premium of around 25% on the market share price prior to the takeover announcement."

Of course, there is as yet no takeover announcement. NGC and Powerco have said only that they're in discussions.

The council's expectation, the press release goes on, is that if it sells now it can get a premium even bigger than 25%; if it waits until "after a merger took place," it might have to accept a discount of 10% of market value that is, $1.83 rather than the $2.03 at which the shares closed on the day the release was issued.

And if it didn't sell, under the straight merger scenario, it would be diluted down to about 13.4%, with the trust at 4.2% and AGL at a dominant 42.7%.

Taranaki voters will have to make of that what they will. The situation will be resolved by corporate players whose advisors are well-versed in the Takeovers Code.

As no one in their right mind would bid for the trust and council stakes separately, anyone interested will be negotiating to buy 49.91%.

Under the code, anyone buying a stake larger than 20% will have to bid for the whole company at the same price, unless it can secure the consent of the non-interested shareholders not to bid.

That, as one legal observer puts it, looks neither attractive nor viable from the buyer's perspective.

Shoeshine reckons there's as much chance of Mayor Tennent getting his 25%-plus premium as there is of Titewhai Harawira running for Parliament on the Act ticket.

At $2.03 a share, Powerco was valued at $641 million. Adding 25% to that would put the price at $803 million or $2.54 a share, compared with First New Zealand Capital's 12-month target of $2.08, Forsyth Barr's $2.29 and ABN Amro's $2.38.

Even at the current share price, its enterprise value is twice ODV (optimised deprival value).

Anybody kicking the tyres will also have to factor in a fair dollop of uncertainty.

Mayor Tennent, who may or may not know something the rest of us don't, seems firmly of the opinion that the talks are about a straight merger of Powerco and NGC, but analysts think a whole range of other outcomes is under discussion.

Since completing a restructuring after the disastrous foray into electricity retailing, NGC under Phil James has intimated repeatedly that it's looking to expand.

But market watchers take that with a pinch of salt, citing incessant speculation that majority shareholder AGL is eyeing the door.

AGL is reported to be considering bidding for Edison Mission Energy's 51% stake in Contact Energy. This would put it in the same position under the code as any buyer of the council's Powerco stake that is, it would have to launch an offer for all of Contact unless it could secure a minority waiver.

It would have to come up with at least $3.4 billion. Releasing some or all of the $1.3 billion tied up in NGC would come in rather handy.

The indications are that NGC is talking to Powerco and, separately, to Vector about flogging off assets, rather than about a merger.

The trouble is that Powerco, in the wake of buying some of the assets of UnitedNetworks, has $1.1 billion of bank debt and skinnyish interest cover of 1.5 times.

So any significant acquisition would more than likely require it to raise capital, something of a deterrent for a potential acquirer already facing some fancy acquisition multiples.

Mayor Tennent's comments suggest the council is a seller come what may. In this he is undoubtedly well-advised.

With things getting "a bit hot," it makes sense for a community investor to get a range of exposure for its capital, rather than just one company.

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