Money Editor for NZ Herald

Tamsyn Parker: Buyer beware the Meridian float

Retail investors need to weigh up the risks involved in buying shares in Meridian Energy. Photo / Ross Setford
Retail investors need to weigh up the risks involved in buying shares in Meridian Energy. Photo / Ross Setford

Details for Meridian Energy's share market float provide both a huge incentive and the potential for a huge disaster for investors.

The payment plan where investors only have to cough up 60 per cent of the cash up front but still get to receive the full dividend is a sweet deal.

Investors are effectively getting an interest free loan from the Government and at the same time getting paid a dividend which reflects the full value of the shares.

Investors won't know until the prospectus is released how attractive the yield is but it is expected to be better than average given Meridian's strong cash levels at the moment.

But the sting in the tail is what might happen over the next 18 months before the second 40 per cent payment is due.

The Government has said the amount of money retail investors will pay for the shares will be capped and will not go up even if the value of the shares goes up during the 18 months.

That means if the value of the company goes up during that time investors are on to a winner.

But on the downside the value of the company could also go down.

That is a very real risk given the general election is due to take place in the second half of next year, before the final payment for Meridian is due.

If Labour and the Greens are voted in the intention is to change the entire way the market is regulated using a single buyer model where an agency would be set up to pay generators a price which reflects the cost of their power production.

Meridian would be a big loser under that model as most of its production comes via water and wind - two very low cost ways to produce power.

The value of Meridian could fall dramatically if that were to happen meaning investors could end up overpaying for the shares through the final instalment.

Of course investors can sell their shares anytime before the last payment is due as Meridian will be listed on the stock market.

It's all about weighing up the risks - unfortunately it's not something retail investors have been very good at in the past.

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Money Editor for NZ Herald

Tamsyn Parker is the NZ Herald's Money Editor. A business journalist for ten years, she has worked in the UK and NZ for the New Zealand Herald, the National Business Review and a specialist publication on investment products for financial advisors. She is passionate about helping readers learn more about to make their money work for them.

Read more by Tamsyn Parker

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