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Current as of 23/09/14 04:20PM NZST

Jamie Gray

Jamie Gray is a business reporter for the New Zealand Herald and APNZ wire agency

Withers defends MRP buyback

Joan Withers says the Mighty River buyback is nothing to do with politics. Photo / Greg Bowker
Joan Withers says the Mighty River buyback is nothing to do with politics. Photo / Greg Bowker

Mighty River Power's $50 million share buyback is more about the company's strong balance sheet than politics, says chairwoman Joan Withers.

Mighty River's share price has performed poorly since its debut on the NZX on May 10 after the Government sold just under half the company through an initial public offer.

The stock closed up 3c yesterday at $2.23 - still well down from its $2.50 issue price but up from its $2.17 low in August. Share buybacks are commonplace and occur when companies seek to support their own flagging share price, while at the same time offloading surplus cash arising from an overcapitalised balance sheet.

Mighty River's planned buyback, which starts next week, coincides with a delicate phase of the initial public offer for its far larger state-owned competitor - Meridian Energy - which is expected to list through an instalment structure, on October 29.

Opposition political parties seized on the timing of the buyback announcement, saying it was an attempt to prop up Mighty River's share price to clear a path for a successful sale of Meridian.

"This is a supercharged political environment," Withers said. "We know that. We anticipate that." Labour's state-owned enterprises spokesman, Clayton Cosgrove, labelled it "an act of absolute desperation".

"Clearly the board could see the writing on the wall and knew the share price would fall even further," he said.

But Withers said Mighty River did not set the share price.

"... and this [buyback] is not a desperate measure."

Withers said there would always be the potential for politicians to put a "spin" on the buyback, depending on their perspective.

"There is nothing political about this [buyback] at all. It's about prudent capital management and about a newly listed company demonstrating to the market that it is going to manage its balance sheet appropriately." Fund manager and Business Herald columnist Brian Gaynor said companies typically did share buybacks to give shareholders the option of selling down their shares.

"With the electricity industry what they've done is very logical because there's no growth in consumption of electricity so companies aren't investing so therefore repaying capital or increasing the dividends is the common thing," Gaynor said. "The surprising thing here is the timing of the announcement because the annual meeting is due in November and we were expecting something like this then ... It's still a Government-controlled company and therefore the political influence can be quite strong."

Prime Minister John Key said the buyback was a matter for the firm, "the Government wasn't aware they were doing that".

"It's highly normal, Air NZ did it last year, companies buy back shares all the time," Key said.

"It's actually a sign of confidence directors have in the company because they actually think the market is undervaluing it and in the context of things this is a $3.4 billion company, they traded $50 million worth of cash."

Shares in the state-controlled power generator and retailer have failed to capture the market's imagination despite a strong showing when they listed. They shot as high as $2.73 on their first day but by August they had sunk as low as $2.17.

Analysts said the stock had fallen prey to bad timing - listing about the same time as the release of the Labour-Greens plan to take control of the electricity market. Doubts about the future of the Tiwai Pt aluminium smelter - NZ's biggest power user - also weighed on the stock.

Lately, Mighty River and fellow power generators Contact Energy and Trustpower have also come under downward pressure as investors sold stock to free up funds for Meridian, which is offering an implied dividend yield of 8.4 per cent.

Withers said MRP's purchase of its own shares provided a return above the company's cost of capital and would be value-enhancing for shareholders.

She said the board had taken into account the company's strong performance against the 2013 initial public offer forecast.

Mighty River's net profit was $114.8 million in the year ended June 30, up from $67.7 million a year earlier and well ahead of its prospectus in April when it forecast a profit of $94.8 million.

And its capital expenditure requirement for this year has been assessed at just $125 million to $175 million, against $200 million in the offer documents.

- APNZ

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