Goldilocks and the 3 energy companies

Bernard Hickey explains why the SOE floats must be carefully positioned - not too hot, not too cold

8th Jan 12, 3:05pm by Bernard Hickey

By Bernard Hickey

Opponents such as me may not like it, but the government did win the election and a mandate for its 'Mixed Ownership Model' (MOM) for partial sale of state owned assets.

So the focus should now be on ensuring the MOM achieves its one legitimate goal, which is broadening and deepening investor involvement in the stock market.

These floats have to be 'Goldilocks' floats, which are not too hot and not too cold.

Getting the price right

If the price rises too much from the Initial Public Offering (float) price then the government will be accused of leaving too much on the table for profiteers 'stagging' the issue.

If the price doesn't rise at all from the IPO price then the government will be accused of leaving nothing on the table and strangling the floats at birth.

Making sure the first float (most likely to be Mighty River Power) hits the Goldilocks target will be crucial in ensuring the floats of the following three energy companies (Genesis Energy, Meridian, and Solid Energy) over 2013 and 2014 are successful too.

The investment bankers will have to earn their no doubt substantial fees by recommending a price that is just right for investors.

Attracting the right investors

The shares sold in the floats also need to be spread around in the right way. If they are pitched and sold too widely there is a risk people are buying shares they don't understand and can't afford. That would ultimately undermine the success of the four floats, both financially and politically.

People already deep in mortgage or personal debt should not be considering buying these shares and any promotional process will have to make that clear, particularly if the floats are being opened up directly to investors, rather than indirectly through brokers, where some element of financial advice would be included.

The Financial Markets Authority may have some interesting challenges if the government pushes the shares too widely and inappropriately.

But if the floats are pitched too narrowly to only clients of brokers and professional investors then they would fail to achieve the government's aim of widening New Zealand's 'ownership' society and would open the government up to accusations it favoured its rich mates.

To sell NZ$5-7 billion worth of shares and to deepen New Zealand's savings culture and stock market the floats will need to introduce a new generation of investors to stocks and convince some hardened sceptics that it's safe to get back in the water.

The floats are a great opportunity to put 'training wheels' on the stock investing bike so investors can eventually get involved again in a broader and deeper way, including buying shares in other smaller, riskier, privately-owned companies.

These MOM floats will be of established, profitable and growing companies that can be explained to a broad population of potential investors, many of whom will be customers of these companies too.

The guinea pig

The first off the block is likely to be Mighty River Power, which I like to call the 'Trip to Taupo' power company.

It owns all the hydro dams on the Waikato River and the geothermal plants near Wairakei. It sees its future growing both the output of geothermal power and the technology around it. It is also investing in this renewable and carbon free form of power generation in America, Germany and Chile.

Mighty River Power generated a Total Shareholder Return (which includes both dividends and asset revaluations) of 11.4% of shareholder funds in 2010/11, which was up from 7.5% the previous year. Mighty River has generated a Total Shareholder Return of 15% per annum compounded since 2007. Hopefully the prospectus will include more information that a wide swathe of New Zealand investors can understand and use.

And let's hope the price of Mighty River's MOM is the goldilocks price. Not to hot and not too cold.

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

39 Comments

by Wolly | 9th Jan 12, 5:52am 1326041562

My view....expect the capex requirements to be exposed as far higher than first thought post the sales and for divs to be lept low while revenue is boosted with power price rises, until the pot produced pays for the capex on the power 51% SOEs...as for the airline...all of them operate on the edge of failure and in need of cash injections.

by steven | 16th Jan 12, 10:46am 1326663994

Air NZ is toast....it will be bankrupt inside 5 years.....no airline can survive oil at >$100 for a prolonged period and thats the future...then throw in a depressed economy with ppl paying down debt so are broke, and its bleak......actually siberian...

I find it laughable that there is a need to restore mom and pop confidence when nothing is being done to ensure a level playing field.....start with a tobin tax to reduce micro-trading or even outlaw it.....If the govn was serious there is a lot it can do....it wont.....

Mom and pops are about to get badly burned.......if the opposition had any sense they would campaign now on such an aspect/risk and how they would fix it....then let the Govn bury itself.....they wont of course, they are reactive and not proactive......no vision because thats risky and no Pollie takes risk.....

regards

by Gummy Bear Hero | 16th Jan 12, 11:18am 1326665894

Wotcha flapping about this time ? ........ Air NZ has a government guarantee .... it can never go bankrupt , so long as the tax-payer is there to prop it up ...

regards

by skudiv | 9th Jan 12, 8:13am 1326049993

Here is how the IPO works (the golden turd ball)

by powerdownkiwi | 9th Jan 12, 9:54am 1326056073

Hmmmm - some 'givens' there, BH.

The societal implications are clear: this asset is currently owned by everybody, rich and poor alike.

It will be more owned by the rich, who expect to profit. They can only do so from the poor, so the result is that the rich get richer and the poor get poorer. I offer no view on the desirability of that process, but point out that blood cannot be gotten from a stone; when the bottom end can no longer pay, the syphon dries up. Given the level of private debt, and the increasing level of collective debt in NZ, you'd have to anticipate further 'drying up'.

What the real issue is, though, is that without energy - how many times have I mentioned this here? - nothing happens.

So this - as with Nestle et al cornering the village wells and flogging the water to the ex-owners, the alternative being death - can cynically be seen as a move to control a life-blood type resource.

Understandable - predictable even - but doomed. Folk fight fairly fiercely for life-essential resources - once they realise that they are being disenfranchised in real terms. This lack of realisation (that energy is a life-blood without which nothing happens) is partly a result of the NZ media failing to investigate. The number of scribes who have differentiated between the desirability of flogging off AirNZ while it's still worth something vs disenfranchising a sector from energy ownership, is nil. A 100% failure, and - with respect for both your intelligence and your integrity - I suggest that includes you.

Luckily, the 'owners' will always be outnumbered by those who expect the electrons to be available, and votes became disengaged from income-levels some time ago.

We will have the debate - the real debate - during the current electoral term; global projections say it will happen regardless of gagging, spin, political obfuscation etc.

Every dollar ever printed is either underwritten by joules, or is ultimately unredeemable. On that basis, what is an infrastructure producint endless joules 'worth'?

by skudiv | 9th Jan 12, 10:35am 1326058519

The amount of "joules" underwriting every dollar is falling, and will continue to do so infinitley. A far greater game of wealth disturbution, then selling the assets of the poor to the rich. JMO

by skudiv | 9th Jan 12, 1:03pm 1326067432

looks like there is still a good 40 years of proven oil reserves left. Heaps of time.

by powerdownkiwi | 10th Jan 12, 8:19am 1326136774

Skudiv - you may just be taking the piss with that, but there are punters out there who believe that stuff. Please don't help continue their ignorance. :)

Use of a finite resource ramps, peaks, then declines. Get yourself a pile of gravel in the drive, and shovel it away. It's easiest half-way through, yes? A big cliff to swing your shovel into, a full load every time. At the end, you're scraping the dregs, and they're contaminated even as you do.

'Supplies' do not run linearly then stop one day abruptly. That's Brownlee-talk; we need to be smarter as a society than that.

Cheers.

by skudiv | 10th Jan 12, 9:38am 1326141512

I agree with what you say PDK, and this means that with declining production we will have longer then 40 years. What that means for me, is that there will always be petrol for those that can afford it. Which means I should be fine, as long as I make some adjustments to my lifestyle.

The sheep believe all the lies, and refuse to accept logic. It's gonna take a massive crisis to wake them up, if that is even possible. I can't change that, what I can do is prepear myself, so I have money, income and the ability to prosper.

Things are very grim indeed for all the sheep, on every front there are crisis looming. With psychopaths and ignorant people running the country, they are going to get it hard. Technological unemployment, currency debasement, declining resources, potential climate change, financial collapse.

It is the best of times, it is the worst of times. A time of great foolishness, and a time of great wisdom.

Knowlege is money in todays economy.

by deepred | 9th Jan 12, 10:50pm 1326102629

David Beatson has further analysis over at Pundit.

by powerdownkiwi | 10th Jan 12, 8:34am 1326137662

He's wrong about Air NZ - it should be flogged-off while it's still viable. When oil gets to $150 a barrel, (or becomes commensurately scarce) no airline on the planet has a viable 'business model'.

He also continues with the business-as-usual perspective. We - and it has been well signalled - are entering a time that is anything but business as usual.

What he does get, is that the corporate options will have qualifications/restrictions imposed.

These will inevitably be altered (public backlash/resentment has to emerge at some point) probably by Labour/Greens next term, and it won't be a 'loosening'.

by Gummy Bear Hero | 10th Jan 12, 12:27pm 1326151620

Freightways , Iain , not Mainfreight . And as it happened , the stock price roared up .... the underwriters gave away a 100 % gain .....

...... and don't we all shed a tear for them .... aha ha de haaaaaaaa !

by Gummy Bear Hero | 10th Jan 12, 10:14pm 1326186886

..... they didn't get duped . The underwriters were too incompetent to see the true value of the Freightways shares they were bailing on , dirt cheap . A win for private investors , Moms & Pops ,.. and you're against that ! ....... Tsk tsk .

If you are going to besmirch the good name of a company or it's underwriters , do get the name right . No sense in Bernard Hickey having to fight a defamation claim from an innocent firm .

by Robo47 | 10th Jan 12, 6:56am 1326131809

I hate governments and think they bugger more up that they fix, hence the situation we are in today.

Having said that I do wonder this: State owned assets are owned by the NZ Government on behalf of its citizens. Right? So in selling them would it not be better that either the revenue gained is given back to the assets owners (NZ Citizens) or the shares that are to be sold given directly to the citizerns of NZ to with as they wish?

For the Government to convert an asset into cash, and then the cash disappear in to who knows where, is a little like robbery to keep an inept bunch of politicians in government.

I guess there is the argumnet that the government have a mandate following the election, but does that give them the right to spend funds from assets as they please?

by Grant A | 10th Jan 12, 8:49am 1326138565

Robo - isn't that exactly what's going to happen, the Govt will sell the assets and reduce some of our common debt burden, same thing ? In answer to your second point, yes they do have that mandate - Govt's buy and sell assets all the time, these are just bigger ones - where do you draw the line ?

by goNZ | 10th Jan 12, 9:58am 1326142715

Its pretty simple abc really . a) NZ govt either borrows more offshore and risks going bust when we cant afford the interest on the loans OR b) sells some assets to raise cash and restrain spending growth OR c) just grizzle and moan and do nothing e.g Billenglish reads an old Malthus book and retires to Waitomo caves and starts blogging on interest.co

by powerdownkiwi | 10th Jan 12, 4:12pm 1326165163

Simple yes, pretty no.

I would suggest you go back and get some math tuition.

Then graduate to some simple physics.

No money is really made, without something real being produced.

No production happens without work.

No work happens without energy.

You - and 100% of just about everyone else - are valuing the primary driver using a third-tier resultant.

It worked on the way up (growth on the back of exponentially-increasing extraction), but not for the assumed reasons. Meaning: getting more wealthy didn't mean being able to garner more energy, actually getting more energy enabled us to become more wealthy. If you correctly identified the primary driver, you could predict the peak of the tertiary.

As some folk here have.

As I recall, mortgaging ones' last properties to stay in a monopoly game, is a doomed play. No Western Govt gets out of debt, post peak energy. Not one, not ever.

But long after the inevitable defaults - and long after we've recorded where de fault lies - we still need energy. It's real. Money is an artificial, recent, one-species construct. It's going to be funny watching the pennies drop as the pennies drop.

by goNZ | 10th Jan 12, 4:38pm 1326166713

Weird stuff PDK, just weird ! Im surprised you use a computer given that its chock full of rare and finite minerals . However we will overlook that as long as you use the recycle bin and save functions as much as possible . Got any more old 1920s theories to tell us apart from 'ol Mathus and charli monkeydarwin ?

by powerdownkiwi | 10th Jan 12, 8:37pm 1326181067

Rather than repeating hackneyed drivel, do the math:

http://physics.ucsd.edu/do-the-math/

Truth beats lightweight spin every time. Are you puking on behalf of Straterra?

by skudiv | 10th Jan 12, 5:01pm 1326168075

What happens to your credit rating when you sell your assets? If I was in debt, sold my assets, how much longer could I keep on borrowing to buy the groceries?

by Plan B | 10th Jan 12, 3:07pm 1326161261

pretty much everyone I ask abou the sale of our dams says the same thing. "its a really dumb idea for us to sell them but I am going to buy some of those shares"

by iconoclast | 10th Jan 12, 4:02pm 1326164578

Something doesnt stack up. In 1999 the Victorian State Government sold all its coal fired power stations (generators only) for $23 billion http://ipa.org.au/library/Energy20.pdf and Victoria has a similiar population as NZ.

by iconoclast | 10th Jan 12, 4:09pm 1326164983

Victoria's generation capacity is 8000 MW while NZ generation Capacity is 6000 MW http://aie.org.au/Content/NavigationMenu/Resources/EnergyData/Power_Generation_Ca.htm

by iconoclast | 10th Jan 12, 4:55pm 1326167723

That's how the russian oligarchs got rich when the soviet union disintegrated - picking up energy assets on the cheap - not saying nz is disintegrating - just questioning who valued the energy SOEs and how the valuations were arrived at - wasnt goldman sucks was it?

by powerdownkiwi | 10th Jan 12, 8:40pm 1326181204

You could argue that hydro was 'worth' more than coal-fired. It doesn't run out, and - build aside - doesn't belch carbon.

by OMG | 11th Jan 12, 1:37pm 1326242229

Something else to factor in - we have plenty of electricity generation

http://www.stuff.co.nz/dominion-post/business/6238761/Stable-power-prices-expected

by powerdownkiwi | 11th Jan 12, 1:47pm 1326242841

That's a turnaround.

The old NZED used to project 2% pa growth forever, throw up their hands and cry 'nuclear'.

You have to factor in

*efficiencies

*build effort.

*displacement (ex oil - electric cars being the most obvious).

by OMG | 13th Jan 12, 1:45pm 1326415523

Latest NASA video. What's your SOE worth if this bears fruit??

The implications are enormous.

http://technologygateway.nasa.gov/media/CC/lenr/lenr.html

Others are hard at work too.

http://ecatnews.com/?p=1830

by skudiv | 13th Jan 12, 2:02pm 1326416545

Extraordinary claims require extraordinary proof

It would be great if they could do something like that in my lifetime.

by OMG | 13th Jan 12, 2:08pm 1326416892

Agree about the need for proof but NASA coming out like that is very significant as "Cold Fusion" got off to a very bad start.

Rossi is claiming to have customers for his version of this process and that the units are being tested as of now.

by powerdownkiwi | 13th Jan 12, 2:40pm 1326418832

I don't know enough to ascertain whether cold fusion is possible, but recent history suggests all is not kosher.

Regardless, nuclear energy supplies one thing - electricity.

That's excellent, and in unlimited quantities, would indeed be useful. It would, sadly, need to be transmitted. Through something. Insulated by something else. Turned into useful work by yet some other something. That work, in turn, would have to be performed upon some other somethings. A lot of peaks to avoid there, methinks. Lotta balls to keep in the air, given that our infrastructure is based on something else past it's peak already, and we'd have to build the other concurrently, so to speak.

Tar, cement, plastics, epoxies, fertilisers, there's a lot cold fusion wouldn't do, although Rumplestiltskin might have had the answer.

I'll just stick to making hay while the sun shines....

by Bernard Hickey | 16th Jan 12, 10:04am 1326661486

FYI from a reader:

Hello Bernard:

I enjoy your columns, but you are wrong in saying voters gave Key a mandate to privatise state assets - presumably by giving them the biggest share of the vote.

I voted National (both my two votes, local and list), and made my choice on a range of issues - actually on the party whose policies pissed me off the least. I voted for National the previous time too. There was no obligation to approve the privatisation in the National vote, nor the previous election did I authorise Key's backtrack on the anti-smacking bill.

If National had said if you don't want privatisation don't vote for us, then you would have been more justified in regarding a National vote as a mandate. More properly, a referendum gives a mandate, but generally, at least in NZ, politicians disregard these.

To me, it's wrong to regard a parliamentary party system as entailing a mandate for all policies officially laid down at an election. Politicians regularly fail to meet these policy pledges. We don't hold them to them, and politicians are lying more than normal if they claim a vote for them gives them a mandate to do whatever they wish.

When Hitler gained his one and only electoral lead (under MMP, too!), he claimed a mandate to do what he liked. NZ politicians should not dare claim similar broad mandates.

Cheers,

Jack

by Gummy Bear Hero | 16th Jan 12, 10:38am 1326663539

...... Bernard : Did you or did you not threaten us with a blitzkrieg & blogger annihilation if we mentioned the name of the little Austrian guy with the funny moustache ?

by Bernard Hickey | 16th Jan 12, 10:16am 1326662194

FYI from a reader via email:

Quoting from your article...

"... the Government did win a mandate for its mixed-ownership model (MOM) for partial sale of state-owned assets."

Key got 47% of the vote... not a majority. His coalition partners are two one man affairs each with vanishing voter support ... and neither electioneered on the basis of a sell up .. nor did the Maori party.. so to put a group together and argue you have achieved a mandate is clearly false. We are not stupid. Fact is there will be some misgivings within the national party, almost certainly. The election turn out was lower than usual... less than 65% the "lowest since the 1980's"? clearly people unimpressed by the choices available... and many who voted for National were obviously not voting in support of the sell off... Key should keep that in mind. So in total Key got 30% of the available vote... not a credible mandate how ever you put it and your introductory paragraph falls short in claiming so. Key has continually tried to undermine the democratic institutions in NZ and his attempt to displace MMP seems yet another example of his wish to simply ignore the wishes of a majority. He just doesn't want to think that he is not supported by a majority ... the News papers have probably contributed to his delusion by making him out to be a "most popular" prime minister, giving space to the emptiness of his PR stunts. 30% support, is ironically consistent with the polls showing some 70% of NZders are oposed to the sell off.... Where is the mandate you claim? Your article is flawed from the outset.... to go on and suggest that a MOM "can achieve a legitimate goal" whatever that means, is equally stupid.... any idea that a sell off of crucial infrastructure will be successful from the stand point of "NZ's best interests" is laughable but tragically so. Bankers and shareholders will profit at New Zealand's expense. Any government silly enough to relinquish essential infrastructure to the control of others is on a road to nowhere, and that is the sad fact for New Zealanders to reflect on. The government is now going to attempt to extract a premium from the sale... the more shareholders pay, the higher their expectation for a high return ... the power prices will certainly rise rather more rapidly than otherwise. NZ'ders are being conned .. and they know it and are leaving in higher numbers than ever. These hogher prices will flow on to other products... don't we already pay the world's highest prices for the milk that is produced in our own back yard. We ourselves approaching our retirement contemplate selling up and leaving .. what is there to stay for but high and rapidly escalating living costs... this country is not the NZ we knew and grew up in ... we have been increasingly baffled as to how it is so much more expensive to live in Auckland than in Berlin, a much more progressive, desirable and exciting city to live, in a country with a real economy and industry, with real infrastructure ..... NZ country seems to be all but finished... The earthquake and disasters that currently befall us... show dramatically that Key never had any vision, no plan, no ideas, no intelligence, no political nous ...his undemocratic ramming through of badly formulated legislation in urgency... often in response to the demands of Americans or outsiders... Hard to see how this nation with its diverse immigrant population will now ever pull together. Your article falls far short or any useful analysis... I lost interest after the first few para's.. keep trying. Sincerely

by Bernard Hickey | 16th Jan 12, 10:16am 1326662214

Fair enough.

But still more people voted for parties in favour of asset sales than against. And it was the main election issue.

cheers

Bernard

by Gummy Bear Hero | 16th Jan 12, 10:27am 1326662835

...... the guys reading your articles appear to be ...... ummm , how to phrase this politely ... well they're thickos , aren't they , Bernard .... dumbasses ..

Good thing Walter & me are here ...... we don't read your stuff , we just colour in the pictures ..

by steven | 16th Jan 12, 10:53am 1326664422

BH, funny but being in Dunne's electorate and attending meet the candidate meetings it was clear asset sales didnt have much support.....Dunne appeared luke warm at best......I dont recollect anyone else except the National candidate supporting it.....

Also I would have said the economy was the main election issue...and JK's promises it was going to be alright........so the main election issue IMHO was FEAR.....

Sitting here in Marlborough looking at houses that were bought for 500k and now are attracting $350k....so are being rented....me thinks the market doesnt look healthy....then there are the fields of posts with the grapes removed......got to wonder just how good things really are.

regards

by steven | 16th Jan 12, 10:59am 1326664758

double post - removed

by steven | 16th Jan 12, 11:09am 1326665340

No mandate, I agree.

Of course they will extract a premium..or try to....bear in mind a newly elected Labour Govn (at some point) will do something about that....it will be in their best interests.....so any private investor expecting monopoly returns maybe surprised...

"Selling up and leaving", well frankly I cant see anywhere else much if any better off....the grass is always greener until you get there....also bear in mind Peak oil and the paradigm shift in energy needs and costs.....Berlin and Germany face a bleak medium and long term future, NZ's looks more stable.....your call...

NZ finished, like I said the grass is always greener....your comments strike me taht you are someone who doesnt get the energy problem we face and think their face an ever better lifestyle.....that IMHO isnt the case....Im afarid I consider that your reply falls short in useful analysis.

Now Chch, yes with 5 or more years of EQs, that city is finished.....Im waiting for the announcment that no re-insurance is possible....I dont think its far off, one or two decent shakes and bye bye EQ cover.

regards