Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Finger over pause button for asset sales

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New Zealand Aluminium Smelters wants to renegotiate its electricity contract for the Tiwai Pt smelter. Photo / Christine Cornege
New Zealand Aluminium Smelters wants to renegotiate its electricity contract for the Tiwai Pt smelter. Photo / Christine Cornege

The Crown's partial privatisation programme is in trouble and Prime Minister John Key will probably announce next week that the Mighty River Power share sale will be deferred until next year - unless he is prepared to sell it at a large discount to its current value.

This is because his plans have struck several problems besides the Maori water rights claims.

These include the Tiwai Point aluminium smelter contract, overly optimistic company valuations and uninspiring profit announcements.

The Prime Minister has made partial privatisation a second-term priority but Tiwai Point has become a particularly serious road block.

New Zealand Aluminium Smelters (NZAS), which is 79.4 per cent owned by Rio Tinto, wants to renegotiate its Tiwai Point electricity contract with Meridian Energy, which is to expire in December 2030.

The smelter is New Zealand's largest electricity user, consuming between 12 per cent and 14 per cent of national output. NZAS wants a lower electricity price and/or a price that is related to aluminium prices.

The smelter is losing money because of low aluminium prices and wants its electricity costs to decrease whenever aluminium prices fall.

The contract with Meridian has a three-year notice clause under which NZAS can close the smelter and reduce its electricity purchases by one-third each year over a three-year period.

This would be a big problem for the electricity industry because national demand is forecast to rise by only 1 per cent a year over the next 20 years.

Closure of Tiwai Point would lead to an oversupply of electricity for some eight to 10 years and affect industry profitability.

The optimistic valuations of Mighty River Power, Meridian Energy and Genesis Energy - contained in the Government's June 2011 year accounts - are an additional issue.

The Contact Energy and TrustPower valuations are their current sharemarket capitalisations.

The SOEs' June 2011 valuations are clearly too high, based on their June 2012 price/earnings ratio of between 27 and 71 and dividend yields below 3 per cent. Genesis did not pay a dividend last year.

The last major SOE sale was the privatisation of Contact Energy in 1999, during which the Crown sold 40 per cent of the electricity generator to the United States company Edison Mission Energy for $5 a share.

It then issued a prospectus for the remaining 60 per cent which was offered "to members of the public in New Zealand" and "New Zealand and Australian institutional investors".

The 60 per cent IPO price was set by a "book building" process which had an indicative range of $2.40 and $3 a share.

The demand was overwhelming. More than 220,000 people successfully applied for shares, and the issue price was set at $3.10.

Contact Energy was sold on a historic P/E multiple of 23 and 2.6 per cent dividend yield at the $3.10 a share issue price.

But the generation industry was in a much stronger position 13 years ago because electricity consumption was growing at more than 2 per cent a year.

There has been no consumption growth since 2006 and demand is forecast to grow by only 1 per cent a year over the next 20 years.

This is before any change to the Tiwai Point contract is taken into account.

It is highly unlikely the Mighty River Power sale will get off the ground unless the Crown is willing to accept a P/E multiple of around 15 and a 5 per cent dividend yield.

This would indicate a value for MRP of approximately $2.5 billion instead of the $4.42 billion in the Government accounts.

But a low valuation will open the Government to criticism.

In 1999 commentators took big swings at the National Government for selling Contact Energy to the New Zealand public at $3.10 a share after selling 40 per cent to Edison Mission at $5.

They said all the shares should have been sold to the Americans at $5 each, giving the Government an extra $654 million.

They said that the 220,000 New Zealanders who bought Contact Energy shares had an advantage over those who did not acquire any shares and the better option would have been to sell the whole company to foreign interests.

In light of the water right issues and Tiwai Point uncertainties it would be a surprise if Mighty River Power's sale proceeds this year unless the issue price is heavily discounted.

Another important sharemarket issue is the partial takeover offer for Acurity Health, formerly known as Wakefield Health. The offer closes on September 6.

This column has a strong dislike of partial bids because they are often smoke and mirrors, they place target company directors in a difficult position and minority shareholders lose control but are not offered a premium for control on all of their shares.

The Acurity offer is consistent with these views.

Austron, which is 50/50 owned by Mark Stewart's Medusa and the Royston Hospital Board Trust, has made an offer for 50.01 per cent of Acurity at $6 a share.

Medusa and Royston already own 19.99 per cent each of Acurity.

AMP, which owns 15.7 per cent, has entered a pre-bid arrangement to offer sufficient shares to enable Austron to reach its 50.01 per cent.

When a bidder is certain to reach 50.01 per cent, it can make a low offer but still obtain majority control.

This is the situation at Acurity. The offer price is $6, compared with KordaMentha's assessed value range of between $6.92 and $7.88 a share, the target company's directors have recommended non-acceptance yet the offer will succeed.

If all shareholders accept this advice, and do not accept the bid, Medusa, Royston and the AMP will be at the front of the queue as far as acceptances are concerned.

If every shareholder accepts in respect of all their shares then each will be able to sell 50.01 per cent of their holdings.

This will mean that Medusa and Royston will control 70 per cent of Acurity - 50 per cent through Austron and 10 per cent each in their own names - instead of the 50.01 per cent they are supposed to end up with under the partial offer.

One of the arguments used by the Medusa/Royston/AMP group is that they need to acquire control so they can change the board.

Why do they need majority control to achieve this outcome when they collectively own more than 55 per cent of the company?

Another issue is that the Royston Hospital Board Trust, which owns 50 per cent of Austron, is a charitable trust and is exempt from tax.

According to New Zealand law a charitable trust must exist principally or exclusively for a charitable purpose.

The trust's latest annual report, which is the year ended March 31, 2011, shows that it had total funds of $24.1 million comprising $16.6 million worth of Acurity shares and $7.4 million in cash and bonds.

Its total charitable distributions in that year were only $92,000 or 0.4 per cent of total funds.

Why is a tax-exempt charitable trust, which makes minimal charitable distributions, involved in a takeover offer for a listed company?

What expertise does this trust, which is supposed to be principally or exclusively involved in charitable activities, bring to the Acurity board?

Acurity shareholders deserve answers to these questions before the partial takeover offer closes next week.

Brian Gaynor is an executive director of Milford Asset Management, which holds Acurity Health shares on behalf of clients and will, reluctantly, accept the takeover offer in respect of all of these shares.

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular 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 Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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