Contact faces battle to sell merger plan

Origin Energy and Contact have a tough job ahead selling their merger, with big investors unimpressed with a plan they feel undervalues Contact.

The deal needs shareholder approval but Paul Richardson, from BT Funds Management New Zealand, said: "I'd imagine few fund managers will be interested in this proposal."

Australian energy giant Origin, which owns 52 per cent of Contact, wants to set up a "DLC" - dual-listed company - where Contact shares remain listed locally while Origin shares stay trading in Australia.

The company would be run by a single management team, but keep two distinct legal entities.

The deal - the first transtasman example of a DLC - would leave Contact shareholders with 24.3 per cent of the new business, with the rest owned by Origin.

Richardson said the merger proposal was a bid for the minority shareholders "by stealth" - when a takeover bid should attract a premium. It valued Contact shares around the $7 mark, which was lower than what many of the investors thought they were worth.

Tyndall Investment Management domestic equities manager James Lindsay said: "On the face of it, it certainly undervalues the business."

Half-year financial results published this week showed a good performance from Contact, but not so good from Origin.

Lindsay said he disagreed with the notion that Contact's New Zealand shareholders would not sell their stake in the company for cash.
ABN Amro analyst James Miller said in a research note published yesterday that a fair share price for Contact was $8.24 and there was a lot of value in the company.

Miller was one of the analysts who recommended Contact shareholders reject a 2001 takeover offer from former 51 per cent owner Edison Mission.

Contact's chairman at the time Phil Pryke advised shareholders to take the offer, saying there was a low probability of a successful competing offer.

"If the bid fails, it is likely the share price will fall from current levels," Pryke said in 2001.

Since those comments, the Contact share price has risen, reaching a high of $8 in November last year. Pryke is now recommending shareholders vote in favour of this merger deal, but the independent directors have commissioned an independent report to give shareholders another perspective.

The concerns from investors come as Pryke wages a charm offensive to win over institutional shareholders.

Contact said it expected two shareholder votes would be necessary to approve the merger.

The first, which Origin can vote in, would need 75 per cent approval. The second, which excludes Origin, would need just over 50 per cent.

Stephen Wright, head of advisory at ASB Securities, said the offer to Contact shareholders was "too low and opportunistic to do it at this point".

"We think the price is too low to be giving them even more control."

It remained to be seen how a dual-listed structure might work in the local context.

"It doesn't really jump off the page," said one fund manager who did not wish to be named.

"A number of the benefits shareholders are supposedly getting are not that valuable." Origin has said that previous unsuccessful attempts for a full takeover of Contact's remaining shares had meant it was not a viable way to go - and that saddling the company with debt would not help shareholders.

Shareholders Association chairman Bruce Sheppard said: "No matter how you dress it up, it is a takeover."


What's to come

* All Contact shareholders will be able to vote on the merger deal.
* An independent appraisal report will be sent out with the relevant details.
* Approval is also needed from the Takeovers Panel, the NZX and the Overseas Investment Office.
* Contact expects shareholders to vote on the scheme in two votes.
* The first, in which Origin can vote, would need 75 per cent approval.
* The second, in which Origin is excluded, would need just over 50 per cent to proceed.
* Contact had more than 95,000 shareholders at July last year.
* Several fund managers and analysts say the merger proposal undervalues Contact.