Meridian's 13.4% yield carrot

Meridian Energy set to raise possibly slightly less than $2 billion

20th Sep 13, 12:05pm by David Hargreaves

<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

"Mum and dad" investors will have to pay a total of no more than $1.60 each to buy shares in state electricity generator Meridian Energy.

The retail investors are being offered a mouth-watering dividend yield of 13.4% for the first 12 months based on the $1 per share price they will have to pay upfront.

Based on the full $1.60 price to be paid this still offers an enticing gross yield of 8.4% to 8.9%.

Earlier today Meridian announced a big increase of its number of shares on issue - which in effect had the impact of vastly reducing the price to be paid.

The retail offer opens on September 30 and closes on October 18 ahead of expected NZX listing on October 29.

Based on the price cap price the offer would raise around $2 billion for the Government, but the final price has not yet been set. The price range for all investors has been set at between $1.50 and $1.80 - but retail investors will pay no more than $1.60.

Various fact sheets have been released, which can be viewed here and here and here. The ministers' release can be viewed in pdf here.

Here are some of the key details:

Indicative Price Range: $1.50 to $1.80 per Share being the sum of the First Instalment plus the Final Instalment

Retail Price Cap for New Zealand Applicants: $1.60 per Share

First Instalment: $1.00 per Share

Indicative Final Instalment: $0.50 to $0.80 per Share

Maximum Final Instalment for New Zealand Applicants in the Retail Offer: $0.60 per Share

Number of Shares being offered: Up to 1,255,870,000 (being up to 49% of the total number of Shares on issue following the Offer)

Crown shareholding following the Offer: At least 1,307,130,000 (being at least 51% of the total number of Shares on issue following the Offer)

Indicative market capitalisation: $3,844.5 million to $4,613.4 million ($4,100.8 million at the Retail Price Cap)

Prospective net debt: $1,120.7 million

Indicative enterprise value (EV): 11 $4,965.2 million to $5,734.1 million ($5,221.5 million at the Retail Price Cap)

• The First Instalment is $1.00 per Share, payable on Application

• The amount of the Final Instalment will be determined by the Crown after the close of the Retail Offer and the Institutional Offer. Based on the Indicative Price Range and subject to the Retail Price Cap described below, the Final Instalment is expected to be in the range of $0.50 to $0.80 per Share

• The holder of an Instalment Receipt on 4 May 2015 must pay the Final Instalment •

A Retail Price Cap of $1.60 per Share will apply to the Final Price payable by New Zealand Applicants who are allocated Instalment Receipts and corresponding Shares in the Retail Offer and who continue to hold their Instalment Receipts in the same registered name until 4 May 2015. This means that the Final Instalment payable by such New Zealand Applicants will be no more than $0.60 per Share. The Retail Price Cap does not apply to any Instalment Receipts purchased on the secondary market

• Applicants who sell their Instalment Receipts before 4 May 2015 will not be responsible for paying the Final Instalment. It is expected that trading in Instalment Receipts on the NZX Main Board and the ASX will cease on 29 April 2015, being three trading days prior to the Final Instalment Record Date.

Here is the statement from Finance Minister Bill English and SOE Minister Tony Ryall:

The Meridian Energy offer document is now available to help New Zealanders decide whether to become shareholders in the country’s largest electricity generator, Finance Minister Bill English and State Owned Enterprises Minister Tony Ryall say.

The document reveals that New Zealand retail investors who apply under the share offer will pay a fixed first instalment of $1.00 per share, and no more than 60 cents per share for the second instalment 18 months later if they hold their investment.

The final share price is expected to be announced on 23 October, and Meridian is expected to list on the New Zealand and Australian Stock Exchanges on 29 October when up to 49 per cent of the company is floated.

The indicative price range for Meridian shares, when both instalment payments are added together, is $1.50 to $1.80 per share for institutional investors and $1.50 to $1.60 per share for New Zealand retail investors.

Assuming the Government sells the full 49 per cent shareholding, gross proceeds from the first instalment would be $1.26 billion. Total offer proceeds will depend on the final price of the second instalment and the mix of retail and institutional investors.

“The Government remains committed to putting New Zealanders at the front of the queue for shares,” Mr English says.

“The price cap gives New Zealand retail applicants greater certainty around how much they will pay for Meridian shares, which is something the New Zealand Shareholders’ Association advocated.”

The price cap applies only to New Zealanders who apply during the share offer and it guarantees they will pay no more than 60 cents for their second instalment even if large institutional investors pay a higher price.

Retail applicants will need to hold their instalment receipts for the 18 month instalment period to benefit from the price cap.

“During the 18 month instalment period, shareholders will receive any dividends in full,” Mr Ryall says.

Paying in two instalments gives investors a higher dividend yield during the instalment period. Meridian is forecasting an implied gross instalment yield of 13.4 per cent^{^[i]} over the first 12 months. This is based on Meridian’s underlying gross share dividend yield for New Zealand retail applicants of 8.4 per cent to 8.9 per cent¹for the same period, which is the level of return if an investor had paid for the shares in full.

“We will be careful to explain to New Zealanders that the instalment payment process is an incentive that gives people an elevated return on their investment because they have only partially paid for their shares upfront,” Mr Ryall says. “Once an investor has paid the second instalment in 18 months, the dividend yield will return to normal levels based on fully paid shares.”

Meridian is New Zealand’s largest electricity generator, using only renewable wind and water resources and producing over 30 per cent of the country’s electricity. It has more than 270,000 connections to homes, farms and businesses, and a track record of strong and stable operating cashflows.

The Meridian offer document was registered with the Financial Markets Authority today.

A ‘consideration period’ has now started and is expected to last to the end of next week. This is a requirement under securities law to allow the FMA to review the document before the offer period officially starts.

During the consideration period, the offer document will be available to New Zealanders atwww.meridianshares.govt.nz. The document will be posted on the website shortly, and New Zealanders can visit the website or call 0800 90 30 90 to order a hard copy.

“People can take this time to read the offer document and start thinking about whether they should apply for shares, but no applications are able to be accepted during the consideration period,” Mr Ryall says.

“The website also has an easy to understand instalment payment fact sheet and information to help people if they would like to get independent investment advice.”

The share offer is expected to open to New Zealanders on 30 September and close at 5pm on 18 October. The institutional offer will take place on 21-23 October.

As part of the Government’s commitment to widespread New Zealand ownership of Meridian, the offer includes a broker firm aspect. From today, brokers will be invited to assess demand from their clients and submit bids for shares. The Government will then choose how many to allocate them.

Labour's SOE spokesman Clayton Cosgrove says that the offer is a "fire sale". Here is his statement:

Meridian is being sold off in a fire sale for $1b less than the $3.1 billion the Government needs to reach its hopelessly optimistic goal of raising $5b to $7b from asset sales, says Labour’s SOEs spokesperson Clayton Cosgrove.

“The Government’s asset sales plan is under crisis management. With Meridian now set to raise $1b less than expected the Government hasn’t got a hope of raising the money it promised Kiwis it would.

“The share price is only $1.50 - $1.80, much lower than the $2.50 for Mighty River Power shares. Given that just half the people who wanted to buy Mighty River shares want to buy into Meridian, it’s no surprise the price is so low.

“This is a fire sale, pure and simple.

“The reason for the low price is that Mighty River shares have substantially decreased in value. The Government can’t risk the same thing happening to Meridian, so they set the price as low as possible.

“The Government was warned by companies such as Macquarie and Forsyth Barr that the price for Meridian would be far lower than expected. They should have called off the sale then.

“The Suzanne Paul-style buy now, pay later scheme will cost at least $40 million.

“The sharemarket is sending a clear signal. It doesn’t have the appetite for more electricity companies.

“The Government is ignoring investors, bankers and the 327,000 people who called for a referendum. They will reject the referendum too.

“Not only is John Key out of touch with the public, he’s even out of touch with his finance mates. Just who is the Prime Minister in touch with these days?

“The asset sales programme is pure ideology and is seriously flawed economically. John Key and Bill English need to take a deep breath, realise that the asset sales programme has failed and put it out of its misery,” says Clayton Cosgrove.

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22 Comments

by Boatman | 20th Sep 13, 1:56pm 1379642189

13.4% yield .... now put that in your BONG and smoke it !

Its almost irresistable

by Stephen Hulme | 20th Sep 13, 2:17pm 1379643451

Yes, some would say those offering up such largesse must have had a toke or two - nonetheless, all those who consume Meridian's electricity must be funding it - were they consulted?

Brian Gaynor noted the implications of such a policy - it is obviously self defeating for non-growth industries. Higher future dividends are only possible if our national incomes rise - and since all these numbers are nominal we may wish to note that the nation's nominal GDPE in the year ending 30 June 2013 was up a miserly 2.07%.

Total dividends for the reported period were $1.91 billion, a 10.3 per cent increase over the same period in the previous year.

The rewards of capital have to be shared with labour if they are paying the electricity bills and hence the rewards of equity ownership from their pay packets.

This represents a payout ratio of 79.8 per cent based on adjusted profits, which is exceptionally high by international standards. For example the Australian Financial Review recently reported that the Australian benchmark S&P/ASX200 companies has a current payout ratio of 70 per cent, just short of the record 72 per cent dividend payout rate during the 1992 recession.

The NZX's high dividend payout is a timely reminder that many of our largest listed companies have limited growth opportunities. As a result they have large dividend payout ratios and relatively high, fully imputed, dividend yields. Read more

by KH | 20th Sep 13, 2:08pm 1379642895

So: What does the government know what we don't. Why are they desperate to get rid of it. Like Tiwai is bound to go? And the retail price of electricity is about to go through the floor? Or something else ? Are these shares really worth 20c.

For most IPOs I assume "If it was any good they would not be selling it" And know I am dealing with insiders, and I am on the outside.

by Chris-M | 20th Sep 13, 2:16pm 1379643389

The government can borrow money through bonds at about 4.5% to 5%, so why sell an asset at a yield of 13.4% initially, falling to 8.4%. They must either be lying about the return, have rocks in their head or ?.........

by Colin Riden | 20th Sep 13, 6:05pm 1379657143

or they are: http://thesaurus.com/browse/treasonous

by Gummy Bear Hero | 20th Sep 13, 7:24pm 1379661855

Oh behave ! .... selling the SOE's was flagged as early as 2008 , and true to their word , not commenced until after their second election win , in 2011 ....

... or don't you believe in democracy ?

Hardly " treasonous " ..... lawdy lawdy , some folk are het up under the collar !

by Colin Riden | 20th Sep 13, 8:09pm 1379664576

I am quite relaxed, and fish are biting well.

by Chris-M | 20th Sep 13, 10:33pm 1379673180

Agree Colin. It is salutary to put a few things in perspective.

They are selling Meridian at a price that values it at less than they are budgeting to spend on the next Auckland harbour crossing and about 60% more than the rail loop.

Meridian owns the following hydro stations

Manapouri,

Waitaki

Avimore

Benmore

Ohau A

Ohau B

Ohau C

The following Wind farms

Te Apiti

Te Uku

West wind

White hill

Ross island

Mt Millar

Mill creek

Mt Mercer.

How many of these do you think that we could build for the same cost as the proposed Auckland projects. Further comparisons. The Manapouri power station has two 10 km long ten meter diameters tunnels through very hard granite. The value of the rest of the station would be far greater than the tunnels. The rail loop tunnels are a bit over half the diameter and about 3.5 km long through soft mud stone. And that is a comparison with just part of one one hydro power station. They have 6 others plus the associated large Ohau canal system and eight wind farms. How many harbour crossings could you build for the same cost as Benmore.

The comparisons dont add up. There is definetly something that is fishy about these sales.

by Stephen L | 21st Sep 13, 7:41pm 1379749290

Chris,

This list better articulates than anything else the tragedy of selling these assets, and I think reflects why the selling of them annoys me so much.

The replacement cost would be in the many tens of billions of dollars. Except that we haven't got a whole bunch of spare rivers to build dams on even if we wanted to.

Meanwhile there has still been no reasonable answer why they are being sold. The dividend stream of more than 8% is over double the government cost of funds. So the pretense that somehow this gives us money to spend on other things is a clear fallacy.

Have the Nats been captured by foreign interests, or are they financially and economically incompetent? I can't think of an alternative explanation.

by Chris-M | 21st Sep 13, 8:22pm 1379751722

Hi Stephen

There cannot be any other explanation than something rather sinister is occuring. I refuse to believe that the polititians are so stupid that they do not appreciate the folly of what is going on and that 80% of New Zealanders understand and oppose it. In light of what has occurred it would appear that this National Government had two main objectives. The first was shifting the tax burden away from the wealthy and the second selling the state assets. Everything else seems to be incidental stuff to be managed, notwithstanding the challenges of the Canterbury earthquakes. Having achieved these objectives I suspect they will not care too much what happens afterward. Perhaps these ideas originate in the merchant and investment banking sector where John Key came from?

by Gummy Bear Hero | 21st Sep 13, 9:26pm 1379755567

... 88 % of NZ'rs were against the anti-smacking bill , yet the Clark government blithely ignored the citizens' referendum ...

So now it's the Gnats turn to spurn us ...

... tough ... vote for someone else next time ..... snap !

.... haaaaaaaaaaaaaaaa !!!

by Stephen Hulme | 21st Sep 13, 9:35pm 1379756131

In June 2008, then prime minister Helen Clark announced that the referendum would not take place alongside the 2008 election as the organisers had been hoping.^[7] The decision was based on advice from the Chief Electoral Officer that holding such a referendum could lead to voter confusion.

Instead, a postal ballot was selected, starting 30 July 2009 for eligible voters and closing on 21 August 2009.

Prime Minister John Key said that the government would change the law if it was not working, but that he believed the current law was working well.^[8] Read on

by raegun | 23rd Sep 13, 7:21am 1379877695

One by one I have to try to educate people about the "anti-smacking bill". That bill was introduced to remove the ability for people to get off taking to their kid with a horse whip by pleading that it was "reasonable force". Now, I am not all knickers in a twist about anyone who chooses to discipline their kid with a light smacking, but now, here is the task for you. I want you to now quantify, in legal terms, what a "light smacking" is.

Me, I'm glad we erred on the side of the horse-whipped kid.

by Gummy Bear Hero | 21st Sep 13, 9:27pm 1379755660

Snap ! ... hmmm , think yer got a gummy shark .... haaaaa .... good'un , Colin !

by Gummy Bear Hero | 20th Sep 13, 5:04pm 1379653454

Poor old Clayton is seriously deluded ... he thinks that shares of MRP and Meridian are the same thing , and that Meridian is cheaper at $ 1.60 than MRP was ...

... Cossie , it's all about the relative earnings and assets per share , not the actual price !

Value and Price ... ummm .. not the same thing , Clayton , didn't either of Cullen or Cunny tell you that ?

by Stephen Hulme | 20th Sep 13, 5:28pm 1379654893

It doesn't matter what he thinks - he had no say how it was valued and then priced .

by Stephen L | 20th Sep 13, 5:46pm 1379656004

Gummy,

You are of course correct, and of course Clayton does understand that. Given though it is the government playing smoke and mirrors with the share price in the first place, it is reasonable he carries on the game. Even if the government felt compelled to have a buy now pay later element to the offer, why would they not have priced it at say $1.50 now and $1.00 later to more or less match the MRP offer? Because they are trying to mislead not so sophisticated investors is the clear answer; given these investors might well have seen the MRP price now at $2.20, and thought $2.50 looked expensive. But ah, $1.60's a bargain. Which in fact it is, (a fire sale in fact) for a bunch of other reasons, but Cosgrove probably realises explaining it to New Zealanders who won't be investing that they are being royally screwed is best kept in simple terms.

I am continually surprised that you hold a government that plays such games in such apparent high regard.

by Gummy Bear Hero | 20th Sep 13, 7:20pm 1379661631

As I've said before , the Gummster has not cast a single vote to the Gnats since 2005 , when Don Brash was their guv'nor ....

... but , given the rubbish policies coming out of the Cunliffe camp , the Lurch-to-the-Lefties , the Gnats are the better flavoured of two rat sandwiches ...

I don't think you can mis-represent that as " high regard " for the incumbent government ...

by raegun | 23rd Sep 13, 7:31am 1379878260

I am totally against something as vital to modern life as electricity being in private hands. My reasons are not purely political.

The problem with it being in private hands is that the primary requirement, like all business, is to make a profit. Profit making should not be the prime objective of supplying electricity. It's prime purpose should be for the providing the day to day necessity of energy to function in OTHER business or to live at home.

Sometimes there will be occasions when returning a profit is not possible, say when new infrastructure is being built or in adverse times.

Another, is seeing that saving power seems to have the net result of prices going up. I believe if the provision of power were to remain in the collective then being conservative with it can be rewarded. As with any private business, the object is to always sell more, and that is the wrongest thing for energy supply, infrastructure and the environment.

by Don m | 23rd Sep 13, 8:27am 1379881620

Raegun i cant follow your argument,,

on one hand you think that if power co.s were private they would make large profits,ramp up prices and make other businesses less competative...

then you think that high power prices are a good thing because they temper demand and encourage power savings.

you ingnore the performance of the state contolled power co,s to date..which over the last 10-15years HAVE ramped up prices,gouged consumers,but instead of spending surpluses on infrastructure upgrades,siphoned them off for other "pet" govt projects(WFF etc)

Under total govt control they have also embarked on uneconomic,costly ugly windfarm projects which lock us into a future of high generation costs.

if selling 49% of these companies helps us follow a more "sustainable"business model then how can this be a bad thing?

by raegun | 23rd Sep 13, 9:13am 1379884418

And that will be because they have been required to return a profit. They should not be run on that basis, primarily, is my argument

by Don m | 23rd Sep 13, 10:08am 1379887725

ok got you now.Profits for private enterprise are bad..but if we call them dividends for the govt then that is alright?..and investment on infrastructure shouldnt come out of profits but out of govt dividends if they have any left over ( after they have given it to more "deserving" options?)