Edison makes its power play

By BRIAN FALLOW

Edison Mission Energy yesterday launched a $1 billion takeover bid for the 49 per cent of Contact Energy it does not already own.

It is offering $3.85 a share cash.

That is 40c more than the closing price on Thursday and 25 per cent more than the average price at which the shares have traded over the past six months.

Shareholders who invested in Contact when it was privatised in 1999 and who now accepted Edison's offer would make, including dividends, a 36 per cent return on their initial investment of $3.10 a share, says Edison's senior vice-president Asia-Pacific, Bob Driscoll.

The share price jumped to $3.95 after the offer was announced, then settled back to end the day at $3.91.

"The market is clearly saying the [offer] price may be a bit light and there is a possibility it may have to be lifted a bit," said John Cobb of sharebrokers JBWere said.

Under the Takeovers Code, Contact's three independent directors will now commission an independent appraisal of the offer, to put before shareholders along with their recommendation.

Mr Driscoll said he understood Contact's financial results for the year ended September 30 would be available to the independent appraiser and shareholders.

The offer, which closes on November 30, will be mailed out once the independent report is ready, which Edison hopes will be around the end of this month.

It is conditional on enough acceptances to take Edison's stake to 90 per cent, the level at which it could compulsorily acquire the rest.

Contact has about 136,000 minority shareholders. About 45 per cent of the shares not already owned by Edison are held by individual shareholders. The rest are dispersed among institutional shareholders, mainly New Zealand-based. None has more than 3 per cent of Contact.

Contact generates about 25 per cent of New Zealand's electricity.

It sells electricity and gas to 480,000 consumers and employs about 500 people.

Mr Driscoll said that if the takeover succeeded, Contact would continue to be run from New Zealand as an independent business.

Edison acquired its initial 40 per cent cornerstone shareholding for $1.2 billion, or $5 a share, when Contact was privatised in May 1999.

Asked about the difference between the $5 then and the $3.85 it is offering, Mr Driscoll said the $5 included a premium for control.

"We believe $3.85 is a full and fair valuation based on our projections of long-term cashflow," he said. It was also above the average of brokers' valuations, which were in the $3.50s. This year Edison increased its holding from just over 40 per cent to 51.2 per cent.

Mr Driscoll denied that the timing of this offer had anything to do with the winter electricity crisis or the weakness of the kiwi dollar.

Edison was a long-term investor, he said, and appraised investments from a long-term perspective. "We have been looking at this since we acquired [a stake] in 1999. We are not driven by short-term gains."

Confidence in the stability of policy was important to Edison, Mr Driscoll said.

The Government, through the electricity inquiry and its handling of the winter crisis, had shown a commitment to the marketplace.

Asked about calls for at least the state-owned generators to be compelled to divest their retailing businesses, Mr Driscoll said.

"We believe that allowing generators and retailers to combine enhances competition and protects the residential and small retail customer."

New Zealand's retail market was highly competitive, he said. "The [customer] churn in New Zealand is relatively high.

"The ownership structure does not affect, in my view, the pricing the generator puts on his product or the prices paid by the customer.

"Those prices are an out-turn of the competitive forces in the marketplace."

Edison Mission Energy has assets of $US15 billion ($36.2 billion), although that figure is expected to drop to $US13 billion after some recently announced British divestments.

It is a subsidiary of Edison International, which is listed on the New York Stock Exchange and which also owns Southern California Edison, a regulated utility that ran into financial difficulty in the Californian energy crisis this year.

Mr Driscoll said Edison Mission was entirely independent of Southern California Edison and had no responsibility for its debts.

In any case Southern California Edison had recently concluded an agreement with the state government that would allow it to recoup losses from being forced to sell electricity for less than it could buy it for.

It would be financially healthy by 2003.