Mighty River Power IPO managers make rare move of speaking on the record prior to float; say few investors have pulled out after Labour/Greens policy shock

By Gareth Vaughan

In a rare move, the joint lead managers of the Mighty River Power float are proactively approaching journalists to talk on the record about the initial public offering's prospects.

This comes after the Labour and Green parties lobbed a hand grenade into the Government's programme of selling up to 49% of three state owned electricity generators and retailers by saying they would effectively dismantle New Zealand's electricity markets if they win next year's election and create a new Pharmac-style agency called NZ Power to act as a single buyer of wholesale electricity. In their announcement last week Labour and the Greens said a key aim was to cut the average household power bill by up to NZ$330 a year.

This led to a supplementary disclosure statement from Mighty River Power, which said the Labour-Greens plan could have a material adverse effect on both the value and market price of its shares. However, the indicative price range for Mighty River Power shares of NZ$2.35 to NZ$2.80 has been left unchanged, although there is discretion for the shares to be priced above or below the range.

Prior to the Labour-Greens announcement, Minister of State-Owned Enterprises Tony Ryall said about 440,000 New Zealanders had pre-registered their interest in buying Mighty River Power shares. And an international road show conducted by the float's joint lead managers has been sounding out demand from institutional investors in Australia, Asia, the United States and London. Key questions since the Labour-Greens announcement have been what impact it might have on demand for Mighty River Power shares and what impact it will have on the price of the shares, and therefore how much money the Government raises.

Andrew Barclay, a director at Goldman Sachs New Zealand which is co-lead manager of the float alongside Macquarie Capital NZ, and Credit Suisse Australia/First NZ Capital, told interest.co.nz interest remained strong in Mighty River Power shares.

"Post announcement of the policy, all parts of the market have responded well," Barclay said. "I think they recognise the opportunity presented by the circumstances."

In terms of the level of investor withdrawal, this was running at "low single digits" in terms of both the percentage of investors and dollar value.

"Concern has moderated post the announcement of the policy significantly and all investor classes are now looking at this more rationally. People have a more rational view of how the (Labour-Green) policy might implement," Barclay added.

The offer opened on April 15 and is due to close on May 3. Final pricing's due on May 8, with Mighty River Power expected to list on the sharemarket on May 10.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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32 Comments

C'mon Gareth.
 
If they didn't say anything beyond the nothing 'interest remained strong', why waste our time and give give this 'non story' space?
 
Or is the story in that Mighty River Power IPO managers are worried enough that they have made the 'rare move of' saying nothing 'on the record'?

Colin,
Reading between the lines, this story shows the lead managers are trying very hard to distance themselves from the absurdly hysterical reds under the bed response of the government to the Labour Greens proposal, and their colleagues in the fund management industry with armageddon is coming to NZ investment type opinions.
It also gives strong clues that foreign investors are really the main target of the float; both initially, and then soon afterwards as secondary buyers..
 

"soon afterwards as secondary buyers" which is interesting, as I agree. I mean I assume that NZers will buy and then try and dump onto the market to "make a quick killing", a very short term outlook. Now we have 12~18months to an election with a probable L&G win, not sure Im looking forward to it but considering how far National has gone off the rails and shown it true colours in this mess maybe that cant be as bad. Anyway will foreign investors take that punt? Safest is to wait to see who wins in 14 and then jump in if its JK again...unless they think they can get their money back inside of 18 months which seems a big ask.
regards
 

Well we think that the advising on this IPO/listing has been just terrible. Looking back on Friday to Monday, the advisors lost control of the transaction. It is difficult to believe that a seasoned advisor exe would have thought of/OKed the PR push that was put together.
The reds under the bed theme was just stupid stupid
And advisors to such do have last say on all transaction communications...
 
The govt. must be wondering, what are we paying these guys for. Its a govt asset sale, the advisors have the sell pricie they want, just how hard is it (like the retail punters have to agree to take stock, price unseen.....). the so when the transaction took a hit and the advisor let the client (the govt) take the heat.... - just read Alex's to see how things are done...
http://www.telegraph.co.uk/finance/alex/
 
It also shows how remarkably unwell connected in Wellington these guys are, as to have no idea what the Labour/greens were thinking. Its like there are already going to lunch on the deal fees. For it did seem they had taken off early last Friday...
 
This note we see s belated butt covering, as it sounds like a wise head in Wellington has put the wind up them with a threat of never again, or not worth half the fee... (both propositions we would agree with)...
 
This deal follows the epic advisory job done on Fonterra - like how did they get the unit price sooo wrong. NZ, we may be the home of grass fed dairy and a stack of hydro, but we certainly not troubled by corporate finance professionals who know what they are doing......
 

but we certainly not troubled by corporate finance professionals who know what they are doing......
 
Brilliant Henry. Quote of the week.

Regards, though nothing to the crystal thinking you offer.
 

Well said.
regards

Although not conclusive this article implies more than low single digits. http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10879587

Even without the socialists exposing their central planning stupidity intentions, the shares promised controlled divs no higher than govt bond payouts...otherwise the electoral impact would be nasty in 014 and 017.
And the p/e was way too high when taking that into account and the high debt levels and the Bluff closedown...and the promise that household power use will decline while the user lobby pressure will increase.
Surely an export company offers better prospect...of regular divs...and a potential buyout for massive capital tax free gains...name your company?

Why use the "socialist" emotive label? isnt Pharmac a world leader and great success?  isnt that a centralised results model studied all over the world?
Tis simple, some expected to make a killing on this and had probably spent the money coming from their expected fees, cuts and payouts. Instead the G&L have just chopped 20%+ off the make believe "value" of the asset(s) and they are whinning.
So the Green's and Labour have finally acted in unison and like a future Govn and shown there is an alternative to the 30 years of free market disaster dumped on 90% of us from the top 1~10%....about time. 
I mean just listen to JK, he's defending 30 years of non-results (we are better off)  with the make believe threat that L&G in power will be the end of us. He's too late his mob have already done for us.
regards
 
 

Pharmac is in fact a great success and a world leader.    Definitely.  Sorry Mist.
Not neccessarily applicable to electricity though.  For electricity we need some more radical restructure.  LIke not allowing any one generator to have more than 5% of the generation capacity.  Something.  Get some real competition into it.
We need to end this social welfare system for big electricity companies.

You are wrong Mist.  But you are right about what measure you use.
If each of us could afford the 3 milliion each that throwing every possible drug at some cancer will cost.  Then we don't need Pharmac.  And mostly for those who do throw 3 million at that cancer - they are dead in a year anyway.  But if you have that money, the 10% chance of survival is worth it.
But we don't have that money for everybody.  So there are decisions to be made.  Hard ones.  And Pharmac does a brilliant job of manageing all of those very difficult things.
So if you have the money yourself, yes get on that plane and go to Texas. Where they will do all those things for you.  And pay the bills for three, maybe four or six milliion. With a likely outcome you will be dead as a nail in a year.   And frankly I would try it myself.
But think of those other Kiwi battlers who have worked decently in low paid jobs all their liives.    who can't get to Texas with an open chequebook.  Pharmac is the organisation that does the most for most.  If not everything for everybody.  They do the hard decisions.
As for the consultants such as your brother, who want to play god, and telll their desperate clients the problem is the political decisons.  What sh..s.
 

I get your passion on this one Mist.  But we do need thoughtful stuff and the job Pharmac does is thoughtful, within a difficult political environment, and where decisions are made where some people die and some don't..  It gets the most for the most people - mostly but not always. 
But Pharmac certainly does not get everything for everybody.  Nobody claims it could.
Self agrandising medicos, like your brother, who can't cope with doing the hard stuff, need remove themselves.

KH - Where do you get "Pharmac is in fact a great success and world leader" from?
What independent studies have been done to prove this claim? Or is this "fact" generated by Pharmac, Government and bureaucrats?
 
 

Can't see that it's a free market disaster Steven.  Rather it's the opposite with electricity.  What we have is a legislated social welfare for big companies.  Who have been given a protected and special position.  Super profits and more. 
if a free market was operated the electricity price would be much less than what it is now.  Maybe 30 to 40% percent of the current price.  The share price would reflect that and fall markedly of course.  But that is only realism.
It's not the business of Government to keep up shareprices to keep the financial services guys happy.  They have been rabidly asking all week for governement social welfare to continue forever, but I see no reason for them to have money from my pocket via inflated electricity prices.
I should point out that a fall in shareholder prices in this manner will have an effect on my total assets.  But I still don't believe in the subsidies this industry has had.

Since when was the term 'socialist' emotive?...and Pharmac is a great thing but it buys the drugs from world suppliers...somewhat different from generating power in NZ and selling it...
As for the 30 years of shoddy capitalism living on credit leading pretty well nowhere...have to agree....but would point out the fabulous economic models of Cuba and North Korea...to name just two utter disasters...seems we can include France in that camp!
The facts are..Key et al are trying to move the peasants toward taking personal responsibility....while Shearer and Norman want to encourage peasants to rely on the State to make decisions for them.
So Steven...are you into handing decisions over to Shearer and Norman...or not?

The way its being used / implied by you, yes.
There is a huge difference between socialiam in terms of NZ and totalitarianism in terms of north korea.
No, thats no fact, key is letting the poor be pillaged by those in more powerful positions. The Greens and Labour aim to redress the imbalance caused by thirty years of theft.
And again you do not have to hand over responsibility for yourself, and nor should you easily. However leveling the playing field so its a fair game, yes Id rather vote Green and shock horror maybe even labour...than watch the nats give what little is left to their mates mean while poluting the planet to our extinction.
regards

Here is the wheeze:
The market has many faults, the greatest of which is that a generation company entering a bid for the supply of electricity at a low bid is finally paid the top bid for the electricity he has supplied to the market. This is unlike any other auction process I know of.
I have personally seen incidents where a generation company has spilled water at a hydro station to force a thermal station to generate. It was more profitable to do this than it was to generate using the cheap hydro energy.
http://www.stuff.co.nz/stuff-nation/assignments/are-you-buying-mighty-ri...
 
Why so you say:
Imagine network demand is 100.
Say Hydro generation can supply 110 at price of $1
Hydro guys pull back vol and bid in 95 at price of $1. and are scheduled for 95
This means Thermal (with higher costs and therefore higher bids) are drawn into the market for the last 5 to meet the network demand.
Say Thermal is scheduled for 5 at price of $3.
Volume wise network 100 is suppied by (95 + 5).
Price users pay 100 *3 = 300
Hydro gets 95* $3 = 285
Thermal gets 5*3 = 15
 
Hydro goes from income of $100 (at max volume of 100 * $1 = $100) to income of $285 (95 * $3). as the last bid price in sets the price for all. Happy Days..
Less is more...
 
During the day there are many bidding periods and multiple bids and rebids.
In short the generators try not to do it in too greater volume/scale so as to avoid attention, but when other factors distract the market, they go for the doctor.
Sometimes they do it to teach each other a trading lesson...
In the literature they are described as trading opportunities...
 
Point being if you really want to know the price for some time next Tuesday, there are folk who can provide an answer today...
Rule change anyone?
 

Thats the rubb. This way to schedule power production into grid was thought of when everything was regulated.
As industry corporatised and privatised all that changed was the name. A scheduling mechanism became a wholeale market in name.
So we have sellers offering supply, and no one on the buy side (the mkt operator coy, shows network load and collects bids and waves everything through...).
 
Its not  a big fix, gas supply is done on a price/vol for rump supply and a price/vol for margin supply. (rather than the marginal price being for all supply).
Whats not to like.
It seems that currrently the free market works fine if you are a seller, but its like the buyer does not turn up to the wholesale market. (& there are many more buyers in number...)
 
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1087...
The prospect of a shift from that to dealing with a brand new Crown agency, set up not to make a profit but to deliver lower prices for consumers, might well look attractive from Pacific Aluminium's point of view.
 

For completeness:
and numbers wise its all here:
http://cadmus.eui.eu/handle/1814/12098
http://cadmus.eui.eu/bitstream/handle/1814/12098/RSCAS_2009_36.pdf?seque...
This paper uses ...... prices and quantities from the New Zealand wholesale electricity market over the period January 1, 2001 to June 30, 2007 to characterize how the four large suppliers in this imperfectly competitive industry exercise market power.
 

All fine and dandy Henry .. but .. how would you fix it? Your thoughts?

Good question.
There are a couple of areas along the supply chain to think about.
1. Let consumers pay wholesale rates electricity price and network charges. (the retail company would charge for holding your account etc, operate it like a bank account, where the customers share of all the market guarantees are held etc). 
- even if we consumers made no change in use patterns, 9 out of ten years the total cost would be lower....
- retail companies would provide apps showing when price spiking, letting those that could turn off the welder etc.... (adding to cost reducing above) being that 1 year to ten....
 
and
2. Flexible tariffs, following Norway/Swedish work, consumers able to buy annual block of power and one price, with over/under use sold back (at second price/purchased (at a third price).
 
1 amd 2 let the network companies give several tariffs as well.. Saurday avro to run the welder....
 
Remembering that the power periods are usually 30 mins, made up of five 6 minute wholesale trading periods. and usually 0.0 of cent per 30 min period (then adjusted to Kwh). Its only when the wholesale price goes to 10k plus does the half hour price get to the price of a coffee.
Pool price gives customers ability to spread across 17520 price points per year..
(the maths is 365, * 24, * 2) divided by power bill cost to get a feel for the per period (remembering to make half hour adjustment for Kwh).
 
3. Generators having bidding price steps as they have rank in the generation stack. So 80% of production within x and y price points, 15% 2x and 2 y 5% within 3x 3y price points.
The could do this when the plants are contracting to join the grid..
or
4. Market could run like gas, where there is a next day trade price for volume x estimated by operator company (based on retailers demand forecast). on the day as volume turns to be v above or y below x, that marginal volume v-x, or x-y would be priced at a wash-up price. Generators would have rights or standing bids for supply so much wash-up volume.  Usually have two go rounds...
 
5. We would probably cut the gentailers in half.
 
Google search power pricing in USA and Scandi (Norway/Sweden)...
Look at real time etc...
 
after lunch we will look at world peace....
 

Henry:- There have been several attempts at explaining the following which I never quite understood - but trawling back through a couple of articles by Grant McLachlan at Stuff found this comment in his article from January this year which sets it out in simple terms that I finally got - is what you are getting at?
 
How the heck was this ever permitted?
It has to be the dumbest way of setting prices - very simple fix for that
 
The way prices are set in the electricity market is farcical. Instead of electricity suppliers receiving the price that they "offer" (or tender), they receive the higher price of its least efficient competitor. For example, if a hydro or geothermal generator (with its lower running costs) offers 80 percent of the demand for 10 cents a unit and a thermal generator (with its ongoing coal or gas costs) offers the remaining 20 percent of demand for 20 cents, the price that both the thermal and hydro generator receives is 20 cents

http://www.stuff.co.nz/stuff-nation/8214151/Lets-rethink-our-electricity-industry

Yes you are right. Welcome on board.....
Price for last volume scheduled in becomes the price for all whom have bid in earlier volumes. Clearing price.. See above "Here is the wheeze" example.
It is a scheduling of volume exercise to meet whole of network demand, the price is the last thing. And unlike price discovery you or I would expect in a traded market. Price did not matter until generation assets private....
 
Other points.
All supply is obliged to go thru the national market.. The generators then have a contracts market, where they reach over the network to the retailers or heavy users. There is also a derivatives market  etc, etc......
 

The Labour Greens proposition is timely is it not? It raises the question of whether the re-structuring of the industry has worked does it not? The question is:- has it served society? or has government revenue gathering exploitation continued unabated? Maybe a 1 year period of price control while they re-examine it could help. Although it smacks of a return to Muldoon-like "government by regulation" a sweetener could be to make the regulation subject to a 12 month twilight clause which would cap it.

Q: Once power assets have moved to private hands is there anywhere in the world where retail tariffs have reduced?
 
Regulation of markets in market economy (like umpire in tennis) is different to regulation in a command economy... IOHO.
 

Superficially the U.K. seemed to be the place where power prices became cheaper after privatisation, but what it actually seems to have been is a coincidental drop in the cost of fuel, and if you take the cost of inputs into account then I know of no other country.
What are strongly correlated with privatisation are attempts at market manipulation by generation companies to maximize profits (things like cutting supply strategically to jack up prices).

They are influenced by gas as well.
Ofgem conceded that falling domestic generation would make Britain increasingly reliant on imported gas, putting further upward pressure on prices. The average dual-fuel gas and electricity bill is currently at a record high of about £1,300 a year, and had been forecast to rise substantially in the coming years – even before yesterday's stark warning.
http://www.independent.co.uk/news/business/news/electricity-pricerise-pa...
 
British wholesale gas prices hit a record high on Friday after the failure of a vital import pipeline demonstrated the vulnerability of the nation's energy supply to external shocks.
http://www.guardian.co.uk/business/2013/mar/22/wholesale-gas-prices-soar...
http://www.guardian.co.uk/business/2013/mar/21/gas-price-warning-short-s...
 
Representatives of the big six energy suppliers have been grilled by MPs over the prices they are charging customers for gas and electricity and the profit margins they are enjoying.
http://www.uswitch.com/gas-electricity/news/2013/04/17/big-six-energy-su...
 

Socialist might be an emotive and pejorative term these days but it wasn't always. It means Government control of large chunks if not all of the economy in the expectation that, on average,  people will be better off.  Most economies run on this basis have been a bit disappointing to their participants but that does not stop people hankering for another go.
I cant think of a better description of this policy than Socialist. Those who think its a good idea should be honest about that at least.

I think when you take anything too far it will fail...so a degree of socialism and a degree of capitalism as part / mix of a society, yes.
The problem is when one is to dominant.
regards

Steven - if you have a degree of Socialism and a degree of Capitalism as part of the mix then it clearly needs identifying which parts should be where.
 
Socialsm permeates every area of our society and is highly dominate. Socialism used to deliver the very basics. Bureaucracy is high leverage by State into every area. SME's have a compliance noose around their necks and it is being tightened contiually.  Big business is in a shambles where many soley exist to form partnerships or some type of agreement with Government or one of its Agencies.
 
Large Government organisations invest in large corporates ensuring the webb becomes so entangled that they are all reliant on each other and backed by the tax payer who only looks at a small piece of the picture and is generally uneducated/ignorant of the system.
 
Now I have no problems with big companies who can stand on their own two feet. The thing is we should all have to stand on our own two feet as we then don't become lazy in mind, body and spirit.
 
 

So Labour/Greens are using a report which says power co's were making large economic profits from 2001-2007, during which time Labour was in Govt and David Parker was Minister of Energy. Says it all really.