NZ Herald business editor at large

Liam Dann: Mighty River float a tricky one

Asset's sale involves balancing act over price of shares and distribution among local and offshore investors.

The key to getting the Mighty River sale right is an open, transparent process. Photo / Russell Smith
The key to getting the Mighty River sale right is an open, transparent process. Photo / Russell Smith

Well, the Mighty River Power sale is going ahead and it will go ahead quickly now.

There is still a lot of anger about asset sales generally, but given that we are likely to see Mighty River listed on the stock exchange before the end of autumn it is important for New Zealanders to take some time to think about the merits of buying in.

Should you be investing in shares if you have a mortgage to pay? If you are going to invest for the first time, why Mighty River? Just because the Government is floating it now, might not some other stock be a better bet? If you already have shares, what sort of shares do you have and is Mighty River the right one to add?

Even if the answer is that Mighty River is not the right investment for you, the focus it is going to get in the next six weeks should provide a good point to stop and consider your investment options.

The debate about the financial merits of assets sales is a good one, and based purely on the numbers the benefits are marginal.

But if it is going to happen then the exercise has to be done in a way that boosts the strength of the local capital markets and adds to the depth and breadth of personal savings.

The Government has made it clear it is keen to see New Zealanders at the front of the queue for Mighty River shares, and we should expect a guarantee that all Kiwis applying for shares will get some.

But as the Government will retain at least 50.1 per cent, with the balance being floated on the market, between 20 and 30 per cent of the shares could go to foreign buyers. So something like 70 to 80 per cent of the shares up for sale will go to New Zealanders and New Zealand funds.

It sounds like the focus will be on personal direct investment by small shareholders - what the market dubs "mum and dad" shareholders.

That adds to the pressure to get the pricing of the float just right.

Clearly the Government sees this as an exercise that will have big benefits for the local market and which could help introduce more Kiwis to capital markets. If it didn't, it would make more sense to sell assets more aggressively offshore to maximise the return to the Crown.

The Government retains strategic control with its majority stake and more foreign ownership would reduce the risk of a political backlash if one of these state-owned enterprises were to melt down.

It is a delicate balance. The Government has to sell the float hard enough to get a good price but not so hard that people - especially the mum and dad shareholders - are left feeling ripped off.

If the stock is overpriced then Mighty River may not deliver the returns that are required to hold the price. If it is undervalued and the deal is too sweet for locals then offshore demand would send the price soaring in the first few days. That might tempt local shareholders to sell for a fast profit, and that would defeat the purpose of looking after local investors.

Getting the balance right on a market float is always tricky. A nicely weighted float should leave some demand but equally not leave the seller feeling they've left money on the table.

You'd expect to see the shares trade slightly higher in the first few days and then settle while the market waits for fresh information about performance. All eyes will be on the Government, the Treasury and the bankers running this process. It will not be easy but the key to getting it right will be an open, transparent process with plenty of investor information.

At the Business Herald we'll be looking to publish as much of that information as we can in the next few weeks to ensure everyone can make an investment choice that is right for them.

- NZ Herald

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NZ Herald business editor at large

Liam Dann is business editor at large at the New Zealand Herald. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy. He hosts The Economy Hub video show every Thursday.

Read more by Liam Dann

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