Meridian sale edges closer

Meridian Energy's Manapouri hydro station supplies power to the Tiwai Pt smelter, the future of which is casting a cloud over the planned Meridian float.

Top executives going on 'pre-deal roadshow' but size and time of offer undecided.

The partial privatisation of Meridian Energy moves closer today with the start of marketing for its planned share market float but decisions about the size and timing of the offer have yet to be made, sources said.

The "pre-deal roadshow" will involve top executives, such as the big state-owned power generator's CEO Mark Binns, talking to the investment community, followed up by site visits. But the presentations will not contain details of the company's likely capital structure, they said.

Meridian's annual accounts are due in August and a sale is likely in October. The Treasury is expected to soon appoint brokers for the offer.

The future of the Tiwai Pt aluminium smelter - Meridian's biggest customer and consumer of about 15 per cent of New Zealand's electricity supply - continues to hang over preparations for the float.

Tiwai's ultimate owner, Rio Tinto, has packaged the smelter up with a handful of other surplus aluminium assets and put them up for sale.

The Rio-controlled New Zealand Aluminium Smelters (NZAS) and Meridian have been in negotiations over the pricing of the plant's power requirements.

One fund manager said "market gossip" was that a resolution was imminent, but neither Meridian nor NZAS was able to confirm, other than to say negotiations were continuing.

There is also political risk posed by the Labour-Greens plan for centralised control of the electricity market but, for the moment, Tiwai looms large.

"It's hard to see them doing Meridian with Tiwai being unresolved," said one market insider.

Aluminium prices remain depressed at around US$1774.00 a tonne. At that price, at least half the world's smelters - including Tiwai - are uneconomic.

Prime Minister John Key said in April that contractual arrangements meant the smelter could wind down over a period of up to five years.

Nick Lewis, an investment banker at Wellington-based Woodward Partners, said the possible closure of Tiwai would pose a big risk for the partial sale of Meridian but the run-down period mentioned by Key would help reduce the float's risk somewhat.

"They are going to have plenty of time for the system to adjust. It's not like they can shut it down tomorrow," he said.

"There will be a discount to the price that has to be applied, but will it kill the deal? No, I don't think it will."

Fund managers regard the float of Mighty River, which the Government intended to pave the way for the partial sales of Meridian and Genesis Energy, as a failure because it continues to trade at a significant discount to its $2.50 issue price.

They said the price could improve upon Mighty River's inclusion in the NZX's main indices later this month.

Rickey Ward, head of equities at Tyndall New Zealand, said Mighty River's share price would be a lot higher if it were not for doubts about Tiwai and the Labour-Greens policy. "It is disappointing. People believe that there is certainly value there, but it is not without its concerns," he said.

The Government has three options with Meridian - by far the largest of the three power companies on its privatisation list.

It could sell a 49 per cent stake, offer a smaller and more digestible stake - perhaps around 25 per cent, or divest through instalment receipts, similar to the way Telecom NZ and Australia's Telstra were sold in the 1990s and early 2000s.