Bargain price - or is that stingy?

By Mark Reynolds

Between the lines

TransAlta Canada's desire to get rid of the minority shareholders on the register of its local associate, TransAlta New Zealand, is understandable.

The company wants to expand, but minority shareholders both restrict its ability to move quickly and might not be prepared to front up with further investment capital. That is particularly so because the company's main minority shareholder is a community trust.

But the offer the Canadian company has made to buy out the 33 per cent of the New Zealand company it does not already own looks a bit stingy.

Sure, the offer price of $2.50 a share is a fifth higher than TransAlta New Zealand shares have been trading at over the past month. But its share price has been pushed down by short-term factors.

The fact is that TransAlta New Zealand is in the middle of a restructuring phase that has created uncertainty for the company, and that has seen the share price generally trend down in 1999 on light volume.

Changes in the electricity industry have affected TransAlta probably more than any other electricity company, and because of that its shares have been out of favour.

The industry changes forced TransAlta to decide whether to focus on being a network operator, or an electricity retailer and generator. It chose the latter path, and sold its Wellington network to United for $590 million. It also sold its gas pipeline network to Australian Gas Light Company.

Then it went on a buying spree, adding retail customers in Christchurch and Auckland to create the nation's largest energy retailer, with 560,000 customers.

Shortly after, it took on those customers it had to increase prices, due in part to increased prices on the network it had just sold. At the same time, it was having to cope with upheaval in the wholesale electricity market caused by the split of former ECNZ companies.

So it has not been an easy few months for TransAlta, and therefore investors have stayed away from the stock while its earnings direction has become more clear. So it is not surprising that an opportunistic takeover bid should come at this time of weakness.

But looking ahead, most analysts see the company recording earnings of more than 14 cents per share this year and remaining at that level in the following year to the end of March 2001. At TransAlta Canada's offer price to minorities of $2.50 a share that puts the company on a prospective p/e of about 18 - hardly generous in a market where its competitors like TrustPower are trading on historical p/es of more than 30.

With that sort of a valuation gap, it is difficult to see an independent appraisal finding the offer fair, let alone reasonable.