Stock Takes

A closer look at the markets by Tamsyn Parker

Stock Takes: Smelter deal clears way for Meridian listing

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Z Energy chief executive Mike Bennetts will lead the company onto the sharemarket after its August 19 float. Photo / Dean Purscell
Z Energy chief executive Mike Bennetts will lead the company onto the sharemarket after its August 19 float. Photo / Dean Purscell

Meridian's deal with Rio Tinto to keep the Tiwai Point smelter open until January 2017 has cleared the way for its sharemarket listing.

Market players had widely expected the contract negotiations to be concluded this month following promises from Meridian chief executive Mark Binns during an investor roadshow held in early July.

The deal gives potential investors some certainty on Meridian's revenue streams for the next few years, given the smelter is such a key client of the company.

The whole electricity sector would have been hit by lower revenues had the smelter shut because it would have resulted in an oversupply of electricity in the market.

But Meridian will also have to concede some earnings potential in making the deal. The company will roll back its power price to last year to keep New Zealand Aluminium Smelters happy.

Analysts will no doubt be factoring this new information into Meridian's valuation.

Treasury last valued Meridian at $6.58 billion in January but that was before the Greens/Labour announcement of plans to introduce a single electricity buyer model if they are voted in at next year's election.

Some are suggesting the new contract could knock as much as $500 million off the value of Meridian.

FUTURE EARNINGS?

Meridian boss Mark Binns is due to announce the company's full year results to June 30 on Monday but analysts will be far more interested in what he has to say about its future earnings.

Binns should give some guidance on what he expects revenues to look like in the next year now the Tiwai deal has been done.

Tiwai accounts for about 40 per cent of Meridian's revenue so it was a key deal to nail down. Many potential investors were of the view that Meridian could not be floated without Tiwai being resolved.

Binns may also use the opportunity of Monday's result to spell out the timetable for Meridian's stock exchange debut, although this is not widely expected from the investment community.

It's more likely the Government will want to be at the forefront for this announcement, which could be made either later this month or early in September.

Meridian is the jewel in the Government's asset sales crown so it will be carefully handled to ensure it is a success.

SWEET DEAL

The Government's decision to throw $30 million into the ring to secure the Tiwai deal shows it is desperate to make its asset sales programme go ahead.

But could it also signal more incentives for potential Meridian investors?

Mighty River Power's bonus share scheme was not perceived as overly exciting and its float has been seen as a relative failure by the investment community.

Many retail investors who bought into Mighty River will be reluctant to try Meridian given Mighty River's poor share price performance so far.

Yesterday's announcement did little to bolster Mighty River and its shares closed down 7c on $2.30.

One analyst suggested a sweetener could include Meridian paying a special dividend to investors in the first year.

The pricing will also be key to attracting investors but, as with Mighty River, the Government is in a tough place having to entice buyers while also ensuring they get a good price for the taxpayer.

SOUR TASTE

The Fonterra Shareholders' Fund has regained nearly all the ground it lost on Monday after the dairy giant revealed its whey protein contamination but the latest debacle has left a sour taste in some investors' mouths.

Units in the fund fell to $6.50 on Monday, down from its Friday closing price of $7.12. But yesterday its units were back up to $7.10 by lunchtime and closed up 6c on $7.09.

The global dairy auction overnight on Tuesday went better than many expected - a factor which has no doubt helped shore up the fund's unit price.

But the full financial impact is yet to be known.

Fonterra has said it has insurance to cover the product recalls.

However, the company will surely also face compensation claims from its customers and potential reputational damage - the value of which may not be known for years.

The reputational damage in China - a huge growth market - may also put a dampener on its future earnings growth.

Fonterra has said the food safety issue will not stop it launching its own infant formula into China but surely the debacle will mean it has to delay its launch plans and wait until the angst has died down a little.

POOR COUSINS

The slow information release to the market about the contamination has also sparked the ire of the investment community, some claiming it is another example of investors being the poor cousins to Fonterra's farmer shareholders.

Fonterra knew about the contamination on Wednesday last week and told the Government on the Friday.

Analysts received a notice from Fonterra investor relations on Saturday morning but it wasn't until Monday that the whole market was informed.

The Financial Markets Authority has already said it is concerned by the slow disclosure and will be talking to the company.

The disclosure issues come on top of unit holders being told the fund will miss its earnings forecasts while farmers are to be paid a record price for milk.

One source said Fonterra was perceived as arrogant by the investment community.

"Time and time again they just come across as so arrogant. Investors in the Fonterra Shareholders' Fund seem like the poor cousins."

Another market player said Fonterra still needed to adjust to being part of New Zealand's capital market. "If you want to be part of the capital market you need to act like it."

They said the fund's forecast downgrade and the food scare were a reminder that the Fonterra business was far more complicated than some might have thought. "It's left a bit of a sour taste in my mouth. I will definitely be a little bit more wary about investing in it."

LAST PUSH

Z Energy is said to be making its last rounds to potential investors on Monday before its book-build next Thursday and Friday.

The petrol retailer, which will be led onto the sharemarket by chief executive Mike Bennetts, is widely expected to be priced at the top end of its $3.25 to $3.75 range, and its August 19 float will be the largest this year after the state-owned power companies.

Market players say overseas interest has been strong with a number of potential Australian investors making the effort to come along to several on-site visits held by the company.

Owners Infratil and the New Zealand Superannuation Fund want to sell between 50 per cent and 60 per cent of the company which will have a total market value of $1.3 billion to $1.5 billion, depending on the price set.

Infratil and the Super fund are expected to do well out of the sell-down and their investment bankers are also being well rewarded.

The prospectus reveals total issue expenses, including brokerage and commission fees, legal fees, accounting fees, advertising costs, postage and courier costs, could amount to $35.5 million if the final price is at the top end of the range and 40 per cent of the company is sold.

- NZ Herald

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