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Opinion: The NZ$2.50 share price for Mighty River was not so bad, but only attracting little more than 100,000 Kiwi investors was a disaster

Opinion: The NZ$2.50 share price for Mighty River was not so bad, but only attracting little more than 100,000 Kiwi investors was a disaster

By David Hargreaves

Forget the NZ$2.50 share price figure that was achieved by the Government in its 49% sale of Mighty River Power.

The real significant number to come out of last night's announcement was 113,857. That's the number of Kiwi "ma and pa" investors who actually signed on the dotted line for shares.

It is just over half the number of people (225,000) who signed up for Contact Energy shares in the last big privatisation sale in 1999.

Mighty River Power had nearly double the shares available for sale that Contact did back then, but ended up attracting over 100,000 fewer people.

When the MRP offer was first announced, I did some very rough arithmetic based on what Contact sold, how many investors it got and also looked at the huge pent up demand that definitely currently exists in New Zealand for fresh investments.

Good publicity

I reckoned with a good publicity campaign there was no doubt that MRP could attract 400,000 would-be investors.

In the event, along came the pre-registration campaign and no less than 440,000 Kiwis signed up as being interested in buying shares.

For every three out of four of those investors to then turn around only weeks later and not bother to invest was an unmitigated disaster. Don't believe anything else you hear.

The price achieved, at NZ$2.50 doesn't look so bad when put against the indicative price range in the the offer of NZ$2.35 to NZ$2.80.

Real target

However, I had long quietly believed that the real target price was probably something closer to NZ$3 a share. That would have raise the Government just over NZ$2 billion, some NZ$300 million more than it ultimately achieved.

Now, with something like 400,000 hopeful punters chasing shares, that price would have been very achievable.

But more significantly, that sort of demand from Kiwi mums and dads would have ensured a strong performance by the stock on the NZX after its listing, which is set for 12.30pm on Friday. And by after listing, I don't mean in the immediate hours after listing.

Game faces on

No doubt, everybody will have their game faces on this Friday and the shares will sell above their offer price and everybody will quaff champagne and tell everybody how wonderful they are. But what about in the days ahead? There's now a real danger the share price might not set fire - as it could have done.

And of course a listless MRP share price could have serious ramifications for the Government's intentions to continue selling assets.

Remember that the Government has aimed to raise between NZ$5 billion and NZ$7 billion through partial sales of MRP, Meridian Energy, Genesis Energy and Air New Zealand.

Full throttle

At this stage it appears to be full speed ahead for the partial float of Meridian, probably still this year.

Meridian is the real biggie. Based on last year's board valuation, sale of 49% of it could theoretically raise about NZ$3.2 billion. But Meridian is dogged by the issue of the Tiwai Point aluminium smelter, which it supplies with power, and whether that will be closed.

If the Government could only cajole 113,857 mums and dads into buying MRP - which in my view is easily the best of the assets being sold because of its diversity of operations - then how can it go on getting people sufficiently interested in Meridian?

Policy change?

Will the Government now change its policy of mums and dads first in the queue and look for the more ruthless solution of getting a big cornerstone investor (most probably from offshore though the NZ Super Fund couldn't be ruled out) to soak up some of the many shares?

The real danger here is that these prime New Zealand assets are being sold cheap. In my view the Government has already under-achieved by about NZ$300 million on what it might have got for MRP. How much more 'slippage' against potential value might  there be for the next assets on the block?

Remember, MRP was a novelty. Every reason to expect big investor interest. So, just 113,857 investors? I'll say it again, Disaster.

Were they right?

Were Labour and the Greens right to come out with their power policy when they did? No doubt it did have a massive impact. Personally I think the policy is loony-tunes, but the timing was a political masterstroke. They shouldn't be blamed for shrewd political manoeuvring.

On the contrary the Government should be blamed for an incredibly inflexible policy that left it a sitting duck. Effectively the Government has said it must get these asset sales away in order to balance the books by 2014-15 - or alternatively face the prospect of having to slash spending on new assets.

Common sense says that the remainder of the asset sales programme should be put on hold till after next year's election.

But the Government seems publicly determined to plough on. However, don't be too surprised if it is privately actually planning an early election.

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60 Comments

You are right about one thing - it was a horrendous flop. The figures that Black Celebration came up with summarise it very well:
96.55% didn't buy the shares.
86% didn't register an interest.

The "mom and pop" who chickened out will regret this.
 
MRP being National's flag on privatisation cannot be seen to fail......so National will move heaven and earth to make sure that the share listing will be a resounding success....
 
Otherwise how are they going to sell Meridian which is an even bigger project further into the year ???

Were Labour and the Greens right to come out with their power policy when they did? No doubt it did have a massive impact. Personally I think the policy is loony-tunes, but the timing was a political masterstroke. They shouldn't be blamed for shrewd political manoeuvring.
 
Do you care to elaborate?

Labour/ Greens loony tunes.  Yes probably.  But measured against the current electricity industry system which is based in cronyism, monopoly and government patronage, not a bad effort.
Personally I would prefer to see a real market.  We don't need a control economy but we do need a decent refferee in the industries where monopolies are natural or constructed.   

I basically agree, though was expecting numbers in the 200000-300000 range due looking at the various demographic inequality measures over the past few years. The people who have been getting squeezed are the sort of people who back when Contact listed might have been feeling confident enough to try a flutter on the sharemarket, there aren't as many of them around these days.

John Key was citing 440,000 registrations to demonstrate some point of public approval.  What does he say about public approval now the number is 113,000 ?

Setting aside the breathless political stuff, for me the key issue was between investment and speculation.  At $2.5 per share earnings projection gives an average PE of about 27 for the 2 years hold before the bonus share issue. For comparison Contact Energy is on a PE of about 18. At 27 MRP seems a speculation. Good luck with that.
 

Spot on Jethro, for me it came down to financial due diligence which probably 100k have not done.
Contact is hands down a better investment from a Value Investors perspective  - EBITDA x, P/E, forecast Dividend coverage 
Alot of people believe the hype, like alot of people believed Colin Meads and Richard Long, and clearly alot of people believe in the valuation of Xero and Moa - Greater Fools

i don't know boatman - who is the fool. me for selling xero shares for a 500% gain after two years or you for spouting off how silly i must have been. ill take the $30k thanks.  

Jethro....Absolutely, good comment.
Cheers

This Green /Labor action has ensured  that foreigners will control the minority stake , becasue they scared off ordinary  Kiwi investors.
Dont blame National for this

Foreigners control Powerco, the nation's second largest natural gas and electricity distribution network operator. Who scared off the Kiwis?

The Government limited local investors to sell 13.5% to off shore. Local retail investors and institutions would have bought more if the government had been willing to sell them a greater proportion of the shares. It is not credible to say that few people buying the shares has lead to greater foreign ownership. It is only that the share held by New Zealander's are owned by a smaller number of them.
If you are truely mad at foreign ownership, then you had better criticise the National government as it is their direct action.

basically , because NZers dont want to live within their means the govt has to either crank up taxes or sell assets or Borrow and hope like the other labour green normans will.If the asset sales go to custard we will all pay for it Big Time

I find that one a hard call. One the one hand I want the government to get the best price possible if it is going to sell state assets. On the other hand I want the most transparent markets possible, so people can't rig prices based on insider knowledge. All in all I favour transparency most of all, so now the government should also have a realistic idea of what it can get for it's remaining assets and adjust its budget accordingly.

I have now reached the conclusion that Kiwis are dumber than Aussies .
Watch how millions of ordinary  Aussies snap up these MRP shares either as individuals , or through Mutual funds or through their personal Superannuations..... and get even further ahead of us by sweating our assets and our labour 
They know a good thing when they see it , Aussies floated their airline ,  utilities, pipelines , airports harbours etc  way back , and they are all better off for it .
Kiwis did not see a good thing given to them  on a silver platter 

What?  Just as stupid as the Aussies who sold their most significant mining ownership rights to foreign investors as far back as 1978 in my memory as a NZ stockbroker. They have had to run a current A/C deficit through the period of most significant uplift of mined material exported to China.

Kiwis offered to buy more shares than the government was willing to sell them.

So we do have to secure/collateralise our debts to foreigners.
 
John Key was not kidding when he implied we do not have ways to cope with our external indebtedness.
 
"It's one thing to be the reserve currency like the United States of America and have very large levels of debt because they, in principle, have ways to cope with that," he said.
 
"In the end, if we have high levels of debt, eventually the ratings agencies will downgrade us again, and over time that leads to a bigger premium on the borrowing that New Zealand companies do."
 
Standard and Poor's and Fitch downgraded New Zealand's credit rating in September 30, 2011, sparking fears that interest rates would rise in absolute and relative terms.

The governments main target to to sell off assets that are not worth keeping or are making less profit over time.  The $2.50 price the government will be very pleased with this considering the events up to the sale.  No point keeping an asset if its going to cause a problem later on. Solid Energy was a company that the government wanted to sell also.  Its good to flick these companies off as quickly as possible.

the Tory government have pushed Solid Energy towards a fire sale - everyone knows the price of imported energy is set to rise and he who holds the energy assets holds the power - status quo steady as she goes - all so predictable - ditto the shenanigans going on in the Privacy arena - mates in the GCSB - give him the power - quash all dissent - coming to a private police estate near you -  status quo steady as she goes our lords in the big house love us
 

Bill English told Radio NZ investor interest in Mighty River Power shows there's enough demand to push on with the Meridian & Genesis floats.
More here - http://www.radionz.co.nz/national/programmes/morningreport/audio/2554467...

Promises were made to interested parties apparently more demanding and obviously deserving than Kiwi "Mum and Dad" owner/investors.

I heard Bill English's interview, and remember thinking at the time "I guess that the level at which it would have been too unsuccessful to continue would be if they had been unable to sell the 35% to New Zealanders at any price".

The shortfall in the hoped for price is already a disaster of sorts for tax payers as we are out 300 mill or so. The blame for that rests with Grabour who were sufficiently keen to mess up the float and score potential political points to not worry about the exchequer.
Who it is a political disaster for might depend on what happens to the share price after listing. If it does spike the potential investors who were frightened off might well be grumpy about a lost opportunity and lay that at David Shearers door.

Scaling
Why don't you do us all a favour and report the scaling rules the Government has applied for teh retail and teh broker over $100000 pools?

Below $2 in 9/12 months, any one ?
Waiting for the IBs to start shorting soon.

Pre-registered no scale back up to 15K, not large investments if that reflects 80%  of total retail kiwi investors.

God help us, this must be one the most stupid articles written by a mean't to be financial commentator - either stupid or down right biased. There is only one reason that small investors did not carry through on their purchase, most of us know lots of them, LG successfully spooked them. What its acheived other than making the price cheaper for the guys able to buy them, and repaying the taxpayer less than they should have, I don't know. The election will judge them too. Mr Hargraves some of us expect better if yoi\ur article ever expect to be read  -  I don't mind opinion but I also expect logic - how can you lampoon the Govt for the uptake, then admit the LG torpedoed it.

logic suggests investors should laud the timing of the LG announcement - it took the top off the share issue price - dividend streams still remain -  there is no guarantee of a LG coalition government at the next election.

The elephant in the trading room of these SOE privatisations is that the government remains majority shareholder. I would expect this to change once the privatisations are completed and the tories are re-elected.

You betcha - total foreign ownership is the plan of necessity.

Oh. I dunno .. Johnson is too much of a congenitally-canny trader .. if he is really smart .. he will sock away a bit of the loot from the raising .. and .. should there come a day .. like GFC episode II .. and the shares fall to say $1.00 .. start buyin' them back ..

LOL
And there I was thinking of foreign lenders making loud and resolute demands to secure our foreign debt.
 
But there again, you could be right. 

I doubt if the internationals have that short a memory .. the UK and Singaporean investors who waded into the AU sell-off of power assets 10 years ago have been taken to the cleaners .. and have been lobbying government every-which-way for a means to extricate themselves .. not very happy chappies

Ohh dear, double jeopardy - stock market price valuation collapse forces NZ Government to further reduce previously Crown determined net worth values of SOE energy companies. This makes Solid Energy look containable.

So far, not so bad.
 
What's the brokerage on stagging odd lots?

Three examples.
1 The Americans-TXU
2 Macquarie bank and venture called Horizon. Total equity loss and reason macbank left gearing power assets to .... babcock and brown. Where are they now. Note equity in a structured finance deal is really an entry in tax accounts (not for widows&orphans).
3 china light and power and the dog that is/was truenergy. CLP guys are beside themselves as to what to do with their Oz mgt and assets.
4 add the japs that got legged by agl selling out of a VIC power station yr before...
5 and international power and its smoker in VIC. Now french owed?

What infratil are thinking being in Oz power mkt. Infratil we gather had to change the name of its power retailer, as the trade name was/is so hated..

Q:why no infratil to be seen re nz power assets adventure?

Good Question
 
Maybe an answer here.
 
Making things more awkward is that the results Z talks about in presentations are the ones it does not disclose - we can see the full numbers for Z Energy and for Z's parent Aotea Energy, but not for group company Aotea Energy Holdings, which is where the shareholder debt lies.
 
Chalkie reckons this all adds up to a headache for investors thinking about acquiring a few shares from owners Infratil and the Super Fund in Z's partial float, if it happens.

We are a big fan of Mr Schrodinger and his cat..

Yes the lark of pretend fuel cogs... who is to know...

As with all those infratil play things, time to internalise the manager. Restore the operation of the liability company. Stop the fir/fees flying......

Some folk seem confused with difference between double entry accounting, & double accounting entries.... ioho....

dp

As with all those infratil play things, time to internalise the manager. Restore the operation of the liability company. Stop the fir/fees flying......
 
H. R. L Morrison and Co has certainly reaped superior fee income on behalf of third party risk capital. Hard to know if the risk adjusted returns warranted the one way flows.

The kicker is they paid to much for the assets. They ignored the effects of peak oil, assuming ppl would by more and more without considertion to cost. As we can see from their own comments they didnt expect a decline in consumption and that decline it seems is throughout the developed world and will continue.  One has to wonder what else "Z" owners missed, and will continue to miss...strikes me that the proposed float is to achieve one thing, find another mug to absorb losses.  So just why would you buy into something that has a pretty close end date? (2020 give or take a bit) declining profits and markets?  Oh and when petrol rationing arrives, what then?
regards

So just why would you buy into something that has a pretty close end date?
 
We involuntarily did so with our citizen shared responsibility for the NZ Superannuation Fund's actions.

Yep...and hence why I have avoided kiwisaver, it cant be mis-managed into loss by incompetants while my debt remained.  One day if we ever see stability I'll just buy shares or whatever looks good at the time that I can look after myself....certianly not today.
The Q is of course just where will most BBs be getting a pension from in order to retire. Just about everything else looks as bad as "Z" just not so obviously so.
regards

Steven, nobody with the slightest grasp of economics thinks that people will buy more and more of anything without consideration to cost.  However, the extent to which demand for anything changes in response to changes in price, varies between different goods.   The economics term is "elasticity of demand" and in the case of petrol it's quite low - a 1% increase in the price has been shown to lead to a 0.15% reduction in consumption in New Zealand.

Do we know how much ended up with Kiwisaver funds?  If there was a low turn out for "ma and pa" investors perhaps they realised their Kiwisaver funds would be buying some so decided they didn't need additional MRP shares outside of this.
"Personally I think the policy is loony-tunes, but the timing was a political masterstroke. They shouldn't be blamed for shrewd political manoeuvring."
You have to be kidding.  We should definitely be holding them to taks for their "political manouevering".  As you have said, the policy is loony-tunes and to make such a ridiculous announcement at the time they did is clearly nothing but outright sabotage.  Didn't a previous Labour government look into a single buyer model and conclude it wasn't workable?

That - Kiwisaver - is a valid line of thought/question.
 
Remember my mantra - money is only a proxy; an expectation that it can be cashed-in for proffered bits of the planet, some time in the future. You can fool yourself right up to the time you go to cash-in. Numerical representation is irrelvant, a point that fools many.
 
This - 'investing' in SOE''s, expecting returns from Kiwisaver - is akin to employees being given shares in businesses with cash-flow problems. It's a no-lose for the boardroom, given their starting-point, but not so good for the employee, who cops a double whammy when the outfit closes down.
 
Globally, we are beginning a long, saw-toothed track towards close-down. Tangible assets will be everything in that light, held proxy will trend to nothing. So ownership, outright as we had, was the best option for society as a whole. The 'individial gain' - tragedy of the commons - issue is just that, not the main story at all.
 
 

To be honest I am increasingly only expecting looney tunes policies when they come out of any LG joint initiative - this is just another $300k Akld  houses one. But if theyre going to come out with them before a float such as MRP, yes better before then after, then bring them out when they can be debated in public first, not when the key parties are not legally able to respond - that can not be classed as anything other than deliberate sabotage and anyone who supports that as being acceptable is basically saying that playing politics for one's own gain is ok even at the expense of democratic debate - is there any other take someone can make on the timing ?

Labour and Greens  did signal their early  opposition to asset sales , and were up for the debate,
Unwilling  to argue  the shifting merits of privatisation, John Key decided  early in 2008 on a strategy  to avoid , a debate on asset sales making  himself unavailable , to any media forum, that would  challenge him.
He correctly assumed he could just  smile , wear silly hats , and sleep walk to victory in 2008.
 
His strategy worked for his  poll numbers, but left Nzers unconvinced of the merits of asset sales .
You reap what you sow.
 
 

Howsoever, we still understand that MRP deal had an exposed/fleshy underbelly. As we posted last week, we feel any traction lg got was mostly due to epic-ly average work by the advisors...

For them to miss this in their deal risk mgt shows, we think poor form/poor understanding of the deal..

Kind of interesting how irrational and extreme such comments as "looney tunes" are.  For me it shows more on the mind set and extremism of the poster than the imagined move to the far left which is really nothing of the sort.
"own gain" and National isnt doing the same thing?  300,000 ppl signed to say they didnt like the asset sales, 9% of the voting population, that is quite a big voting block against to contend with next election.  Labour and the Green's are clearly against the sale and have said so, they in fact beautifully played that ahead of the next election and have left the present govn unable to muster a decent reply.  That's democracy in action, its in the open for the voter to see.
regards

Steven I dont think the 300000 you quote were ever going to vote national anyway(actually piss poor really when you tally up the total Lab Green support at the last election,
as for the"present govt unable to muster a decent reply" have a look at Bill English hand the weasel Russel his arse in parliament......http://www.youtube.com/watch?v=LMkDnuySfzo&feature=player_embedded.

I am more worried about my arse's share of the valuation of the 51% government holding in MRP - shit they should have sold the lot - now they have sought a public pricing mechanism we all stand to be worse off - not to be unexpected when the state tries to palm off an asset to professionals at a 27+ P/E multiple. They must of thought it was as good as aapl - look how that turned out.

would you not think that in these circumstances, promoting a PE of 27, implies there is a tacit agreement between the vendors and the institutions that power prices will rise in the forseeable future? Can you think of any other plausible explanations?

Well, a publicly priced misunderstood agreement if Contact Energy is an indicator of substance.

Quite right. If you can flog something off for 27 times what it can earn in any given year you should.Even a government ought to be able to reinvest that money in something that gives a better yield for the poor long suffering taxpayer.

Grant A.
You may not agree with the L/G policy, but evidence dosen't your support comment.
Herald says,
"Of the 113,000 individuals who bought shares, 78,000 did not hold a common shareholder number. That indicates they are new to sharemarket investment. And that many of the stay-aways were more experienced investors who did not like what they saw when they calculated the risks. The high proportion of new investors does, of course, have a silver lining, and the stock exchange will be hopeful they gain a taste for the sharemarket and add other holdings"
Taxpayers didn't feature in Nationals thinking.
Asset sales only  benefitted 5% of the taxpayers(3% as it turns out) at the expense of the remaining 97%
Nz ownership in  MR dropped 17% in one day, 
 
 

Incorrect - the taxpayer has lost nothing as they received full value (less what LGs cut from them) from the asset they owned, and will no doubt then use that money to buy other assets. Tax payers in the new ownership wasn't my point

Today we will see the share price rise and insitutions buy more of the stock and some punters buy more shares.  However I believe sometime between May or June we will have a good stock market correction globally and you should be able to pick up the stock for a lot cheaper.

Lets hope you got more than the odd lots on offer and don't have to scramble to get a position worthy of financial management time.

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