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Opinion: The pending float of Meridian Energy will shape whether the asset sales programme is seen as a success or failure

Opinion: The pending float of Meridian Energy will shape whether the asset sales programme is seen as a success or failure

By David Hargreaves

If you have never watched any of those shopping channels on TV, can I recommend you squander a few minutes of precious time and look at these spectacular salesfests.

Me, I'm never going to buy a thing. But I admire the energy and versatility that goes into flogging all manner of products that seem to have no reason for existence, let alone any practical use.

Sometimes, so good is the patter, that you can almost be convinced that you really do need this product.

But then comes the bit that always turns me off.

Throw in another

That's the moment when your new best friend sales person says that not only can you have the product cheaper than the advertised price, but hell, they'll throw another one in free.

No doubt this is intended as the "hook" - the key selling proposition. But Doubting Thomas here is inclined to think: "Well, if you're trying to sell it to me for effectively less than half the advertised price, what is it worth really?" And then I answer myself: "Not much."

Okay, it might be seen as stretching matters a little to compare the forthcoming sale of 49% of Meridian Energy with one of those TV sales patters.

But then again, consider this as a spiel: "They're worth $4 each, but I'll let you have them for $2.50. And, wait for it, you only have to pay me $1.50 now and the rest in 18 months time. And, incredibly, I can give you your full whack of dividends in that 18 months. And, boy are we going to pay you some dividends - all of our profits and more!"

Do you see where I am coming from now?

Cash-belching

Meridian is being marketed as some sort of cut-price, cash-belching machine.

It is going to be hard now for the Government to talk up Meridian as a quality investment when clearly the company is, as they say, being priced to sell.

I would stress that I am not an investment adviser and I'm not advising anybody one way or another about Meridian. The company has some fabulous assets and produces some fabulous cashflows. It's a great business. But, as they say, please consult your financial adviser before deciding whether to invest or not.

However, my gripe is all about a Government that is trying to flog something at a time when it should be holding on to it. 

And for the removal of any doubt - if you are having to resort to gimmicks to sell something then you really should be asking yourself whether now is the time to sell. If the timing is truly right then a good asset will sell at a good price and the seller won't have to throw in a set of kitchen knives as an extra incentive.

Meridian demeaned

Resorting to marketing ploys to sell Meridian in fact demeans the company and almost guarantees it will be sold for less than it is worth.

The Government is already now conditioning the public to expect that its earlier target of $5 billion to $7 billion to be raised from asset sales will be revised down.

If you go back to January 2011, Prime Minister John Key was being quoted in the media as indicating that asset sales might actually raise as much as $10 billion. We should be so lucky.

More sensibly the Government later publicly set the bar at what I would suspect it thought then was an artificially low $5 billion to $7 billion. 

After all it is always better to under-estimate. Talk about $5 billion to $7 billion, but then actually raise $8 billion - and the Government folk are looking like geniuses.

Worse than a dog

Of course in the meantime, one of the prime assets sitting on the block ready for sale - Solid Energy - turned out to be something worse than a dog. We still don't know what that might cost us taxpayers.

So Solid Energy was off the block.

But we still had 49% of Mighty River Power, Meridian Energy, Genesis Energy and around 22% of Air New Zealand ready for action.

Just to explain. The Air New Zealand situation is slightly confusing. Remember, it is already listed on NZX, with we taxpayers owning 73% of it. So, if the Government sells 22% of Air NZ's shares that will leave it holding 51% for us.

Going back a bit, Mighty River was valued at about $3.9 billion, Meridian at around $6.5 billion and Genesis a little over $2 billion. Collectively that's $12.4 billion. So, 49% of that and we get $6 billion. Sorted! Comfortably in the middle of the Government estimate and still with a chunk of Air NZ to flog. What could possibly go wrong?

Hostile policy

Unfortunately by adding to the mix a hostile Labour/Greens policy to radically shake-up the electricity industry and then the likelihood of closure of the electricity-sucking Tiwai Pt aluminium smelter in 2017, the whole equation alters.

Mighty River Power - which I still think has the best mix of assets of the state power companies - ultimately raised just under $1.7 billion for the Government. Based on its earlier $3.9 billion valuation it should have raised closer to $1.9 billion - if not more. I'm convinced the Government thought and its advisers would have told it, that it could in fact get over $2 billion from Mighty River.

But it didn't. 

And even more disastrously, the company's share price has slumped well below the listing price of $2.50 and the whole company's currently worth about $3.05 billion. This is despite the company more than matching its pre-float financial forecasts. Investors are collectively down over $200 million on the purchase price, though they are, again collectively, getting almost $50 million in dividends at the end of this month.

So, now, with a tap-dancing SOE Minister Tony Ryall and Finance Minister Bill English and the Prime Minister himself forming a high-kicking chorus line, we get the razzle dazzle sales pitch for Meridian.

Short term consideration

The pitch is this Government in miniature - focus on the short term and don't worry about the future. And if you are inclined to disagree with that last statement, consider for a moment the Government's stance on superannuation and refusal to raise the retirement age.

The price the punters will have to pay for Meridian shares should be clearer when the offer is officially launched on September 20 - bearing in mind that this time there will be a published "cap", a maximum that can be paid.

Horrendously, the market talk coming out of Australia (and there's reasonable evidence from what happened before the MRP float that this market talk has been 'guided' by people in the know) is that the Meridian float could be priced to raise only about $2 billion. Whatever happened to the $6.5 billion valuation for the whole company, implying a value of $3.2 billion or so for 49%?

But if we took $2 billion as a guide and divided it by the nearly 800 million shares to be sold (always assuming there isn't a late change in share structure*) then we would get a share price of around $2.50 - the same as Mighty River. Spooky. Maybe the Government would want to avoid such a direct comparison.

$1.50 upfront?

Anyway, if we said $2.50 for argument's sake, then the 60% that the punters pay upfront would give a purchase price of $1.50.

If Meridian were to simply match this year's profit (and presumably the forecasts will suggest a bigger profit) and then pay it all out in dividends, then it could pay about 18c a share, which would give in very basic terms a gross yield on that $1.50 of about 12% - which does square with the (we have to suppose very informed) talk coming out of Australia.

So, Meridian becomes the ultimate "yield play" - at least for 18 months. And the Government's banking on that fact to be enough to get the shares away.

Then next comes Genesis next year. We know it is valued at about $2 billion. But we also know from the MRP and Meridian experiences that those valuations are not meaning a lot in front of the current market.

If we applied an arbitrary 25% cut to that valuation, leaving us with $1.5 billion, then 49% of that would give a little less than $750 million. At current market prices the Air NZ share block might fetch around $300 million, depending on how it is sold.

$4.75 billion for us?

Potentially then, we the taxpayer might be looking at a final booty of $4.75 billion - which isn't exactly $10 billion, is it?

The sensible thing now would be to hold off on any further power company sales till after Tiwai Pt closes and see how the market shakes out.

But, too late. That's not going to happen because the Government's too committed to the course of action that says it has to sell these assets to buy more assets and balance the books by 2015 - for however long they may stay balanced.

Honestly, all this effort for potentially as little as a $4.75 billion payout that will go nowhere fast in the scheme of Government financing.

Will it have been worth it?

*Footnote: A very late change was indeed made to the Meridian share structure, three days after this article was originally penned. The new share structure adjusts the calculations in this piece to an issue price of around $1.60 and an upfront price of something in the region of 95c.

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31 Comments

Speaking of asset sales in general..
I read that the Greens were arguing that the average return on the assets being sold was 14% p.a.
(Seems like a solid return to me)
However the cost for government borrowing is in the region of 3-4% p.a. which calls into question the need to sell assets to reduce debt.

Does anyone know if these figures are at all accurate or just based on accountancy preformed on the back of a paper napkin?

I think the Greens got someone to do it, should be on this site at least.
10 year bonds are something like 3.2%?, so after inflation the true rate is more like 2%...pretty low borrowing.
In the meantime I think the Govn insisted on a return off the SOE's of 6%+?
Then the Govn takes the money from the SOEs and uses it as seed money in PPP partnerships, you can bet your bottom dollar the private bit will want 7% or more....
To me it doesnt seem very sensible to say the least...of nothing else PPPs have been an abject failure everywhere else.
regards

I think you need to get another hobby.
 
Today, NZ Government 5.50%, 15/04/23's closed at 4.765% according to ANZ/NZX.

now now dont get bitchy....
Even at 5.5% is hard to see PPPs wanting a lower return for their money.
http://www.anz.co.nz/commercial-institutional/economic-markets-research/...
Last time I looked 3.14%....and I did use a ?   that means query....
Sure I dont do bonds, but I vote and like to learn and walk around with my eyes open, and query things itl Im satisfied whats going on and the effect unlike many in here.....
Such as yourself....yet to see your comment on the financial impacts of peak oil....or maybe you are living in the la la land of BAU still?
Lets look at one comment on the SOE sales,
After sell off its expected that the dividends would rise to private sector levels....so that means far higher prices?
http://nzier.org.nz/publications/soe-part-sales-must-lead-into-yet-more-...
oh yippee doo doo.
We are already being screwed over....

. If all of this was used to reduce debt, and if the SOEs were to raise their performance (and dividends) to private sector levels, then the Government’s future borrowing needs would reduce by around $250 million a year. - See more at: http://nzier.org.nz/publications/soe-part-sales-must-lead-into-yet-more-...

Such as yourself....yet to see your comment on the financial impacts of peak oil....or maybe you are living in the la la land of BAU still?
 
Meow!
Since you seem to make it up as you go along why not contain yourself to ticking ballot box papers.

  S Hulme - coming from a 'don't scare us' person, that's a joke. Shooting the messenger may help you reject something cranially, but it won't change the facts.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
+
 

Did I talk to you?

Yep, fear, made your pile from parasitic behaviour and now we are looking at the oops payback....and your money is safe no where....total justice I think.
regards
 

Your comments lack the veracity of a professional and I guess you follow my endeavours with as little investigation as you do the bond market.

Like I said, you build a fine castle, on quicksand.
So once you determine more of the same of what you do cant continue as is, then following your endevours is, pointless.
Oh and by the way, this isnt a professional site as such....but I so notice that you make similar comments at fellow right wingers?
No?
So anyone who doesnt meet your political point of view gets it...
yes, so professional that.........
regards
 

I didnt make up peak oil, I just read until I understood it. And maybe just maybe have an inkling on how badly its going to impact us and our economy, our civilisation even.
Meanwhile yes sure you are an "expert in banking" or whatever....all that means it seems is you are unable to grasp anything outside of your expertese and indeed reject it...
So just who is competent oh builder of fine castles on quicksand?
So sure Im no expert in finance, but considering the chasm of lack of knowledge on this site masked over by right wing rhetoric, denial and bluster...Im hearing in spades, all I can say is yeah right.
 
regards
 

... I didn't make up energy surplus and fossil fuel abundance , I just read lots of annual reports by mining companys , and oil  industry experts such as Daniel Yergin , until I got it ....
 
There is no quantifiable peak !

sooooo oil output will grow for ever in your estimation?
wow....
So flat crude output (more or less) since 2006, is just a temp thing?  $110US is a temp thing, back to $50 soon and for ever?
yes, wow indeed.
regrds

nooooo .... because we'll stop using crude oil long before we run out of it .... in the same way that the stone-age didn't end because we ran out of stones , ditto for the ice-age ....
yes, wow indeed
regards

oh and we'll transition like we did from the coal age to oil age, to uh waht btw?
Yes we sure will stop using it, we wont be able to afford to extract it.  Given the marginal cost is about $90USD a barrel and the presene sell is about $110 plus the max our economy can stand is around $120 its not looking good. This  means oil fields above $120 dont look economic so wont be developed, so a steep decline it output, this effect looks like  its going to be inside 10 years...
 
regards

Not saying you are right or wrong , just saying that we can all fall into traps, an easy one is using an analogy that does not actually fit. waht is really happening. The software guy arron swartz explained this very well when describing different ways of thinking about IP and IP theft.
Easter Island ran out of something- I think it was trees rather than rocks- is that right?

Can you please explain the rate you mention above.
Is it a rate that the government sets- ie decides to borrow NZD at? Governments borrowing in their own currency choose the rate don't they?

Plan B,  do you mean this?; 
Today, NZ Government 5.50%, 15/04/23's closed at 4.765% according to ANZ/NZX.
 
If so, it is the market determined discount factor (4.765%) traders are willing to pay to receive the sem-annual coupon stated in annual terms (5.50%) up to redemption of this particular NZ Goverment promise to pay.
 
This NZDMO PDF primer should answer further questions in respect of calculation etc.

One would have to know if the asset values were at book or market.
If sold at a premium to book then this comparison may not be relevant.

Ha ha, just watched an ad from Craigs Investment Partners on my TV, to buy Meridian, just before the weather on TV1.
Got quite a big tv, eyes although getting old, do function.
The small print was so small, and so abundant. Learnt something many years ago, Someone who thnks you are an idiot, always hides it in the small print.

You haven't seen many investment ads then.
 
Don't sweat it. The same small print is what is running on the Meridian ads on this website. Quite readable.
 
It's the law (as prepared by the previous government, and passed by this one); every ad for investments have significant ad disclosure requirements. You should worry when you don't see them or have acces to them - the one's without the disclosure are the dodgy ones.

If the law mandates an investment advertisment should show disclosure, then the disclosure should be visible and able to be read by the average punter, who is being subjected to said advertisment.
Otherwise it's just a sham.
Either there is disclosure, or there isn't.
Displaying 10 lines of unreadable text for approx 3 seconds, is not disclosure.
There is a reason disclosure is required, too many people screwed over by fine print.

Don't invest based on a TV ad, whether you can read all the detail or not.

David, are you saying we cannot, even trust our own government? 

... if you can't even trust Colin Meads or Richard Long  , you sure as hell-fire can't trust the government ...
 

Trust schmust...GBH...As long as people like Faye wander round the place Knighthood intact, unmolested....short memory syndrome prevails.
BTW .....me old matey potaty...what's a Richard Long...? is it a euphemism...?

Saw him swanning around the Americas Cup venue with his old friend Mike Moore.

if an ex-All Black  or any other prominent sportspersin  recommends something as a good investment then I know definitely not to go near it.  They may be good at sports but good businessmen they certainly  aint !

... I think we can extend that to medicaments too .... no Sir Bob Charles deer velvet for this little Gummy Bear !
 
In fact , totally ignore anything health or medical ever spruiked on RadioLive .... even if it claims to have  revitalised Colin & Verna's zest for hanky-panky ...
 
 

David , excellent piece , I had to read it twice because its got some multi-dimnesional thought- provoking  insights .
Wearing  a Kiwi cap...You are probably right about the timing , not ideal , and being sold at under-value .
Wearing my long-term  investor cap , I dont like Meridian because of the post 2017 potential problem with the smelter .
So I wont take a punt and just stick with MRP.
As to the Greenlabour threats to reduce prices , it will never happen , if they get into power they would be bloody idiots to mess up the income coming from something they own a 51% stake in .The Greenlabour threat just shows their utter ignorance of fundamental economics

If Meridian are the lowest cost producer of electricity in NZ and the ones with the most reliable supply - based on loss of Tiwi then who knows how much money they can make and how much they could manipulate the market. Repairing things in the middle of winter etc.