ACC airs questions on energy merger

The Accident Compensation Corporation has raised the spectre of a legal challenge to the proposed $8 billion merger of electricity companies Contact Energy and Origin Energy, say sources familiar with the situation.

The ACC, which manages a portfolio of investments worth more than $6.5 billion to help cover its long-term claims liabilities and is one of Contact's largest shareholders, has obtained a legal opinion that throws up questions over the number of shareholder votes needed to give the controversial plan the green light.

The merger is to be effected by two shareholder votes on the proposed scheme. The first resolution, a special resolution, requires a 75 per cent majority of all shareholders.

The second, an ordinary resolution, requires the support of at least a 50 per cent majority of shareholders other than Origin, which already owns 51 per cent of the New Zealand company.

But the ACC believes the threshold for this second resolution should be 75 per cent of minority shareholders.

The rationale for its objection remains unclear as the ACC has declined to comment. It is, however, likely to be concerned that the 50 per cent threshold will allow control of the company too easily to go to Origin.

Fund managers have long argued that such a important decisions can often be decided by small minorities since many smaller shareholders often do not participate in shareholder votes. Raising the threshold to 75 per cent offers some insurance against this.

The ACC has also sent its proposal to other fund managers to raise the possibility of joint action to modify the plans.

Under the plan, Contact investors effectively swap their holdings for a stake in ContactOrigin, formed by a contract between the two companies. Contact and Origin shares will continue trading on the New Zealand and Australian exchanges.

Contact will be seeking orders from the High Court proposing two shareholder resolutions to approve the merger proposal.

Documents outlining the proposal are due early next month ahead of a vote in August.

The plan already has the support of Contact's independent directors Phil Pryke, John Milne and Tim Saunders.

Contact told the Business Herald the proposed arrangements were consistent with the NZX Listing Rules for related party transactions and the Takeovers Code.

"Contact Energy considers these thresholds meet statutory and regulatory requirements, and are consistent with those required for previous schemes of arrangement," said the company's general counsel, Ross O'Neill.

"This is what we will be asking the court to consider."

The ACC's objections are the latest in a series of doubts on the plan, which would create the largest integrated energy company in Australia and New Zealand, with 2.6 million customers and A$5.5 billion ($6.6 billion) of sales.

Sydney-based Origin, Australia's No 2 power retailer and the largest holder of oil and gas exploration permits in New Zealand, says the plan would help alleviate Contact's dwindling gas supplies and rising fuel costs.

But shareholders are sceptical of this argument, saying there's nothing to stop Origin boosting its exploration under the current structure.

Contact's shares have more than doubled since the company went public in May 1999. The stock, which closed at $7.35 on Friday, sold at $3.10 apiece in the company's initial public offering.

CONTACTORIGIN
The proposed merger of Contact Energy with Origin Energy:

* Contact will retain its NZX listing, while Origin will keep its ASX listing.

* Origin shares and Contact shares will have the same voting rights and get equal dividends.

* It will be 75.7 per cent owned by Origin shareholders. Contact shareholders will own the remaining 24.3 per cent.

* To put this ratio into effect, bonus shares will be issued to Origin and Contact shareholders.

* Contact will pay out an imputed special dividend, comprising a taxable bonus issue of 7.3 shares per 100 existing shares and 5c a share in cash.

* Origin will "sell" its 51.4 per cent stake in Contact and no longer be a shareholder.