Complications lie ahead for share floats of state assets

Sam Stubbs, Tower's head of investment management, believes the Mighty River Power float will be a success. Photo / Janna Dixon

Rainfall, regulations and the Waitangi Tribunal have some potential investors in the coming sell-down of state assets scratching their heads.

The Government announced plans last weekend to sweeten its proposed state-owned enterprise floats with a bonus share scheme but professional investors say there are still a number of major issues to be addressed.

Mighty River Power is expected to be first off the block in September, followed by either Meridian or Genesis Energy.

Coal miner Solid Energy and a further sell-down of the Government's share in already listed Air New Zealand are also on the agenda.

The last time the New Zealand market saw a major power company list was lines company Vector in 2005.

It had a bumpy road to listing as directors of its major shareholder at the time, the Auckland Energy Consumer Trust, fought between themselves over the float plans.

But it opened on the sharemarket at a 26 per cent premium to its issue price.

Contact Energy, which listed in 1999, had a difficult start after it failed to achieve its 2000 forecasts but then took off strongly.

Mighty River Power, seen as being similar to Contact, already faces a challenge over water rights from the Waitangi Tribunal.

Paul Harrison, head of equities at BT Funds Management - the investment arm of Westpac Bank - said the Waitangi Tribunal issues meant potential investors had to make an assessment of what the impact on earnings might be if the company had to pay for water rights.

"It adds complexity to the float. But I would expect it to be resolved before the listing."

Harrison said investors in Mighty River Power also faced other risks, the main one being that the company was very dependent on rainfall to control its earnings stream.

"It could be quite volatile."

He also had concerns about New Zealand's regulatory environment for the power companies.

"The regulatory environment in New Zealand seems to have become more aggressive in the last 12 months."

Companies such as Chorus, Sky TV and SkyCity had all felt fallout from regulatory and political interference of late.

Tower head of investment Sam Stubbs said there was still quite a lot of uncertainty over the floats.

"At this stage, from an investor point of view it's still early days," Stubbs said. "The devil is in the detail and we have yet to see a lot of details."

Despite the challenges, Stubbs believed the Mighty River Power float would be a success.

"You have got to look at it from the retail side," he said.

"Any large listing with an incentive to buy it and predictable dividend yields we think is going to get a high degree of interest from the retail side.

"That will in turn underpin institutional interest because institutional investors like successful investments.

"Regardless of the price, the bottom line is that this is exactly the sort of company the market wants to buy right now."

Stubbs said the bonus shares were aimed at getting new investors into the sharemarket as well as encouraging people to hold onto their shares and there was plenty of proof that the system had worked overseas.

The only potential downside of the loyalty scheme was that the demand might be so strong it sent the price higher.

Stubbs said the fact that three of the floats were power companies could result in investor fatigue for the sector but he did not believe that was likely because the environment was conducive to utility floats.

He said it was too early to assess the potential success of two other share sell-offs - Solid Energy and a decrease in the Government's share of Air New Zealand.

Stubbs said airlines were a problematic asset class.

"Arguably Air New Zealand is one of the best run companies in New Zealand. But that will be a hard sell by virtue of being an airline."

Solid Energy was a challenge because few people knew much about the mining sector in New Zealand.