Peter Lyons: Buyers beware on Mighty River Power investments

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Peter Lyons says he can't get excited about the Mighty River float - either as an investor or an economist. Photo / NZ Herald
Peter Lyons says he can't get excited about the Mighty River float - either as an investor or an economist. Photo / NZ Herald

I can't get excited about the Mighty River share float either as an investor or as an economist. Some New Zealanders are being given a chance to buy shares in businesses that all of us already own. Despite the hype over the impending share float, no actual numbers have been revealed yet about pricing or potential returns. This will happen now that the expressions of interest have been completed. So far the positive vibes about the sale have been driven by those who stand to make money from the sales process. Novice share investors need to be careful that they don't get burnt in the mounting clamour.

Shares in Mighty River Power are unlikely to be sold at bargain basement prices compared to their earnings potential. If the Government was to significantly underprice the float they would be shortchanging New Zealand taxpayers who are the present owners.

MRP appears to be a yield stock rather than a growth stock. The dividend yields on power companies listed on our share market such as Trustpower and Contact Energy are around 6 to 7 per cent.

Their price earnings ratio, which represent the price would-be investors must pay for each dollar of earnings range, is around 18. Investors also need to be aware that share prices can be volatile. The share price for Contact Energy has ranged between $4.60 and $5.60 over the past year. Government advisers for the sale will be paying close attention to the metrics of these companies during the sales process.

Mum and Dad investors also need to be aware that if they are buying relatively small amounts they will be subject to brokerage fees of between 2-3 per cent if they trade these shares. The Government is paying brokerage and other transaction costs on the initial sale. This represents a large subsidy to the financial sector of anywhere between $80 to $150 million if all the partial privatisations go ahead. For this reason buyers need to be wary of advice given from this quarter which is likely to be sympathetic to the seller.

Some investors see the floats as a potential bonanza of windfall profits if the share price spikes after the initial sale. This is a high-risk strategy as the price can just as easily drop, as investors in Facebook found to their dismay. Anyone taking this approach would need to be investing a significant sum to make the hassle and transaction costs worthwhile.

The hype surrounding the float needs to be kept in perspective. We already have major power companies listed on our exchange. The offer of these shares does not represent a unique opportunity that is not already available on our sharemarket unless the Government gets its pricing horribly wrong. In that case, as the present owners we all lose.

As an economist, the partial privatisations of these assets still don't make a great deal of sense. It seems to be a cornerstone economic policy of this Government. Yet despite all the hassles and dramas involved in overcoming the opposition, the policy is not a major transformative winner for our economy. It represents a transfer of assets with the Government receiving cash in return for these businesses. There may be some efficiency gains through greater accountability or transparency by being listed but these are unlikely to be major. Being publicly listed doesn't ensure great results otherwise Feltex would still be with us.

The argument that partial privatisations will encourage more depth in our financial markets and greater financial literacy among Kiwi investors also doesn't bear much scrutiny. The funds spent on buying shares in these assets are no longer available for investment in new start-ups or the expansion of existing businesses. Nor are they being used to expand the businesses. There are cheaper ways of promoting financial literacy. To encourage novice share investors to take the plunge by investing in a very narrow range of companies defies one of the basic rules of investment. Diversification!

Peter Lyons teaches Economics at St Peter's College in Epsom and has authored several Economics texts. He is a shareholder in Trustpower and Contact Energy.

- NZ Herald

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