Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Challenge holding onto investors after float

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Mighty River Power needs to promote loyalty bonus scheme.

Rail firm Aurizon, with its loyalty bonus scheme, kept a higher percentage of its original shareholders than Contact Energy. Photo / Supplied
Rail firm Aurizon, with its loyalty bonus scheme, kept a higher percentage of its original shareholders than Contact Energy. Photo / Supplied

The fantastic response to the Mighty River Power (MRP) partial privatisation shows New Zealanders are interested in financial assets as long as the investment proposition is attractive.

More than 200,000 individuals have pre-registered for the MRP share issue, indicating it should attract more shareholders than Contact Energy, which had a New Zealand IPO record of 225,000 shareholders.

The huge response to KiwiSaver, which has 2,060,000 members compared with the Treasury's initial forecast of just over 600,000 by mid-2014, is another indication that New Zealanders will invest in financial assets if the content and structure of the proposition is attractive.

However, the big difference between KiwiSaver and MRP is that investors are locked into the former until they are 65 years of age whereas they can sell MRP shares as soon as the company lists.

One of the big challenges of the MRP IPO is to convince investors, particularly individuals, to remain shareholders over the long-term.

The competitive electricity market dates back to 1987, when the New Zealand Electricity division of the Ministry of Energy was corporatised to form the Energy Corporation of New Zealand (ECNZ).

Contact Energy, which acquired eight power stations and a number of other assets from ECNZ, was formed on February 1, 1996.

The remaining ECNZ assets were distributed between Mighty River Power, Genesis Energy and Meridian Energy on April 1, 1999.

The previous day Contact Energy issued a prospectus for the sale of 361.5 million shares, representing 60 per cent of the company, with the issue price to be determined at a later date through a book building process.

This is a process whereby institutional investors submitted price and volume bids and the Crown determined the final share price based on these bids.

Contact Energy's indicative price range was between $2.40 and $3 a share compared with $5 a share paid by the United States-based Edison Mission Energy for the remaining 40 per cent of the company.

The prospectus said 40 per cent would be owned by the cornerstone US shareholder, 20 per cent disturbed to global investors through the IPO and the remaining 40 per cent would be offered to New Zealand investors.

The response was overwhelming and the final IPO issue price was set at $3.10 a share which was above the $2.40 to $3 indicative price range.

Contact Energy listed on the NZX on Tuesday May 11, 1999 and its share price closed at $3.34 that day, an immediate gain of 7.7 per cent.

The shares finished the first week at $3.51 with 134.2 million shares, or 37.1 per cent of the IPO issue, going through the market during the first four trading days.

Six months later the total number of Contact Energy shareholders had fallen from 225,000 to 190,200 and there was a further reduction to 164,600 shareholders by November 2000.

The company now has just 75,500 shareholders indicating New Zealanders are keen to buy shares in electricity generators but less enthusiastic about holding them for the longer term.

This is a shame because Contact Energy has delivered a gross return of 10.5 per cent per annum since listing in May 1999.

Contact Energy was the last Government IPO in New Zealand and Queensland Rail, now called Aurizon, was the last across the Tasman.

In October 2010 the Queensland Government issued a prospectus for the sale of between 60 per cent and 75 per cent of Aurizon, a major rail coal transporter. The Queensland Government would retain the remaining 25 per cent to 40 per cent.

The indicative price range was between A$2.50 and A$3, but retail investors were offered two important incentives:

Shares would be issued to them at a 10 cent discount to the final price.

Queensland residents would receive a one for 15 loyalty bonus share issue if they held their shares for 12 months (up to a maximum of 675 loyalty bonus shares) and non-Queensland residents a one for 20 loyalty bonus share issue (up to a maximum of 500 loyalty bonus shares) if they held their shares for the same period.

The final price was $2.55 a share - with individuals paying $2.45 - and 1618.6 million shares were issued through the IPO representing 66.3 per cent of the company. The remaining 33.7 per cent continued to be held by the Queensland Government.

Aurizon listed on the ASX on Monday November 22, 2010 and closed that day at $2.65, an immediate gain of 8.2 per cent for retail investors.

Shares finished the first week at $2.84 with a phenomenal 46.9 per cent of IPO shares changing hands in the first five trading days.

This massive post-listing trading activity is a bonanza for stockbrokers, mainly because investment bankers are hopeless at matching supply with demand. They leave potential long-term holders unsatisfied, meaning these investors have to scramble to purchase shares post-listing.

Aurizon had 79,500 shareholders when it listed in November 2010 but this had declined to 62,500 shareholders by August 2011 and to 58,700 a year later.

Thus after two years Aurizon had lost 26 per cent of its shareholders whereas Contact Energy lost 36 per cent of its original shareholders during its first two years. In other words Aurizon, with its loyalty bonus scheme, kept a higher percentage of its original shareholders than Contact Energy, which had no loyalty bonus scheme, although Australians, on average, tend to be better long-term shareholders than New Zealanders.

The good news is that Mighty River Power will have a loyalty bonus scheme.

But the details have yet to be announced. One option is to have a one for 20 loyalty bonus issue after one year, up to a maximum of 300 bonus shares, and a further one for 20 bonus issue after two years, also up to a maximum of an additional 300 bonus shares.

The second loyalty bonus would be based on the number of shares received through the IPO.

However, it is also important that MRP reinforces the benefits of this loyalty bonus scheme through post-listing advertising and through its investor relations communications.

The purpose of these commun-ications is not to try to discourage shareholders from selling their shares but to remind them that they will receive a loyalty bonus if they hold them for a certain period of time.

The other important issue for the Crown, and its advisers, is to match supply with long-term demand through the IPO process.

KiwiSaver funds could play an important role in this regard.

Mighty River Power is an ideal investment for long-term oriented KiwiSaver funds because the company owns long life assets that should deliver steady returns if managed properly.

The total value of all KiwiSaver funds has surged from $5.2 billion to $15.4 billion over the past three years but New Zealand equities now account for just 9.6 per cent of total funds compared with 11.2 per cent three years ago.

This is mainly because there are not enough opportunities on the NZX.

In addition, growth assets represent only 45.6 per cent of total funds, which is far too low, and the total amount invested offshore has risen from 46.4 per cent to 50.2 per cent, also because of the limited domestic investment opportunities.

Mighty River Power represents a great opportunity for KiwiSaver funds to increase their exposure to growth assets and New Zealand companies.

If the Government is serious about keeping the company in New Zealand hands then the majority of the shares should be distributed to New Zealanders, with an attractive loyalty bonus share scheme, and to domestic investment managers, particularly KiwiSaver funds.

Brian Gaynor is an executive director of Milford Asset Management and portfolio manager of the Milford KiwiSaver Active Growth Fund.

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

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