By Gareth Vaughan
The float of Mighty River Power shares has been negative for the sharemarket, and Meridian Energy is likely to attract fewer "ma and pa" retail investors putting question marks around the viability of the Government's plans to sell up to 49% of Genesis Energy next year.
So says Milford Asset Management executive director, and veteran sharemarket commentator, Brian Gaynor.
"I've been critical about all our (government) floats going back to 1986," Gaynor told interest.co.nz in a Double Shot interview. "I think government's have handled them all very poorly."
He said he'd hoped the Mighty River Power float in May would prove the exception., because it was very important for the sharemarket.
"It was an attempt to attract people into the sharemarket and to keep them there and to show them the benefits of investing in shares. Okay, about 110,000 came in, but they haven't had a good experience," said Gaynor.
"After the shares were listed we found that anybody buying shares was actually selling other shares to buy shares so there was no new money."
"From our point of view we look upon Mighty River Power as having a negative impact on the sharemarket," Gaynor added. "And therefore because of that you've got to say that one of the objectives of the Government's IPOs, which was to encourage people back into the sharemarket, has not been successful."
Government, investment bankers only beneficiaries with Mighty River Power price too high
He suggested the only real beneficiaries from the Mighty River Power share sale was the Government itself, because it got a higher price than it probably should have, and its investment banker advisers.
Mighty River Power shares were sold for $2.50 each in May. After rising on day one they quickly fell below their listing price and have languished there ever since, trading at $2.27 today.
"I think investors have to be careful because the objective of the Government is always trying to get the highest price," Gaynor said. "And it incentivised the investment bankers on the basis of the price they get. So their commission, or their fees, is based on the final realisation price."
"I'm quite critical of that. I think it should be based on a combination of what is achieved through the IPO and what the share price is in a year's time.
"So I think the price was too aggressive, $2.50 was too high," said Gaynor. "There was a strong incentive for the merchant bankers, investment bankers, to get it to that price. Admittedly there was some timing aspects. It came around the time of the Tiwai Point concerns and also the Labour-Greens (electricity market) proposal and at a down time in the market. But you have to conclude that the price was too high."
The emergence of the Labour-Greens policy of re-intervention in the electricity market had cast a big shadow over National's selldowns of State Owned Enterprises (SOEs), Gaynor suggested.
"To me the biggest risk with Meridian is that exactly - it's the political risk. It's the risk of a Labour-Green combination coming in at the next election and making a radical change to the electricity industry, which would certainly have a big impact on Meridian Energy's profitability and the profitability of all the companies in the sector," Gaynor said.
The details of the Meridian float were announced last week, with the suggestion retail investors will pay a total of no more than $1.60 per share, in two tranches, and institutional investors up to $1.80. Retail investors are being offered a dividend yield of 13.4% for the first 12 months based on the $1 per share price they will pay upfront. See more on the Meridian details in David Hargreaves' article here.
Meridian price too high, doubts Govt will get anywhere near 100,000 retail investors
Gaynor said he would be "absolutely amazed" if institutional investors, such as Milford, paid more than retail investors. He also suggested the price per share being sought by the Government was too high.
"I think $1.60 is a very high price given the political risks that are out there. I wouldn't be surprised if the price came a reasonable amount below the $1.60 (per share). The institutions I know, and certainly us here, we consider $1.60 to be absolute tops and probably above what we would be willing to pay."
Asked what he thought a fairer price might be, Gaynor suggested something around $1.30 to $1.40 per share.
He also said the dividend yields ought to be even higher given the dual risks of Tiwai Point and the Labour-Greens policy. And fewer retail investors were likely to buy Meridian shares than bought Mighty River Power shares, Gaynor added.
"Remember Contact Energy (in 1999) was 228,000. It was just around 110,000 for Mighty River Power, (and) I doubt if they'll get anywhere near 100,000 for Meridian."
"Certainly we (Milford) don't have the direct contact with the retail investor who is investing their own portfolio. But we hear from share brokers that the level of interest in this one (Meridian) is far less than it was for Mighty River Power. So therefore you've got to assume that if they get 70,000 or 80,000, they'll be doing quite well and they may even struggle to get to that amount," said Gaynor.
"People's memory is short at times but they do remember Mighty River Power and they're down on their investments. They're down about 10% or 15% in a market that has actually been quite reasonable, particularly over the last six weeks. So that's going to impact the Government's ability to be able to attract retail investments."
Big political risk
Meridian recently struck a deal for a new electricity supply contract for the Tiwai Point aluminium smelter helped by a $30 million taxpayer-funded payout to the smelter's owners Rio Tinto. Under the deal the smelter, which had been threatened with closure and uses about 13% of all New Zealand's electricity, will remain in operation until at least 2017.
Whilst Tiwai Point remained a risk for Meridian, Gaynor is adamant the Labour-Greens policy is the bigger risk.
"The political one is by far the biggest (risk), it's much much bigger than Tiwai Point. It's a major concern. Of course this week we had some opinion polls coming out showing Labour had picked up after the change in leadership ( from David Shearer to David Cunliffe). And the fact he (Cunliffe) picked David Parker as his deputy leader, and Parker was a very strong supporter of the new Greens-Labour Party proposal regarding the (electricity industry, indicates the Labour Party's going to continue down that same path," said Gaynor.
Critical of Treasury
In terms of Genesis, the last of the three electricity generators and retailers the Government plans to sell down, Gaynor said a share sale next year would depend on how Meridian goes.
'That's why I think the (Meridian) price is going to be below $1.60, it has to be. If you're going to sell Genesis you're going to have to have an attractive price for Meridian," he said.
"Say, for example if Meridian comes on the market and the share price goes down, there will be no interest in Genesis. Absolutely none. They'll be lucky to get 10,000 retail investors. So they have to make Meridian Energy attractive if they want to sell Genesis. But I'm not so sure they understand that."
"I'm very critical and have been of Treasury over the last 26, 27 years and their involvement in these IPOs. They don't seem to understand them," said Gaynor.
He had no evidence Treasury officials ever talk with people in the finance industry, or the Shareholders' Association, to ascertain what the key interests are of the people interested in buying shares.
"They (Treasury) are like a retail outlet that says 'I know best, I know what I'm going to charge,' without ever doing any customer research to find out what the purchaser or the customer wants."
Upbeat on Air NZ
However, in terms of Air New Zealand, the final SOE in the Government's sell down plans - now the beleaguered Solid Energy is a no go - Gaynor is upbeat. The Government owns about 73% of the airline, which is already listed on the sharemarket, and says it wants to sell down to 51%.
"We think there's a good chance that (an Air NZ sell down) will come before Christmas. And that's probably quite different to the energy companies because the airline industry, although it's very volatile, and although people like Warren Buffet have been very critical of the airline industry, Air New Zealand is a very well run company."
"It's doing exceptionally well. It has had very good management over the last six or seven years and continuing with the new chief executive. (So) we think it's actually going to be quite attractive," Gaynor said.
He expects the Government to issue a prospectus and take an IPO approach to the Air NZ sell down, rather than just sell the shares in the market.
"It's likely if they do it before Christmas it's because the earnings outlook of Air New Zealand is quite good. So if they come out with a prospectus it will probably have to have forecasts and because those forecasts are probably going to be quite reasonable and quite attractive, the PE (price to earnings ratio) and dividend yield is going to be far more attractive than the electricity companies."
"Therefore I think Air New Zealand will be a quite easy company to sell off and the likelihood is it's a good time to do it because the company's doing very well," Gaynor said.