The acquisition would give Contact a more diversified generation portfolio across the North and South Islands, arguably helping de-risk its generation to dry year risk.
It also adds a far more renewable development to its pipeline.
The major shareholders of Manawa (Infratil and TECT Holdings) have a combined stake of 77.9% and have committed to support the scheme.
If the deal proceeds, Infratil will end up with a 9.5% stake in Contact and have another $180m in cash.
Contact says the two companies’ assets are complementary, with different seasonal generation profiles, allowing Contact to better manage dry-year risk and to sell larger volumes of fixed-price electricity into the market than it could independently.
But going on the competition watchdog’s comments made in its “statement of issues” released last month, the deal is far from a slam dunk.
“We consider that the aggregation of the parties’ businesses would result in a merged entity with a substantially greater ability to impact the average wholesale electricity spot price more than Contact or Manawa would be able to do independently of one another,” the commission said.
Contact Energy is heavily invested in geothermal power generation. Photo / Supplied
Power retailer Electric Kiwi, a long-time critic of the current setup, said in its submission to the commission that electricity markets are not currently functioning in a workable and effective manner.
“Allowing further concentration by permitting one of the gentailers to acquire the largest independent generator will only enhance the market power of the gentailers [generator-retailers], and will have a substantial impact on competition,” it said.
In its submission, telco 2Degrees, which is also an electricity retailer, said any further consolidation in what is already a highly concentrated (wholesale) market was likely to substantially lessen competition.
Contact, in response to submissions suggesting that it was unwilling to spend more on new generation, said it had invested more than $2 billion in renewable development in recent years, including geothermal, grid-scale batteries and solar.
Craigs Investment Partners portfolio manager Mohandeep Singh said it was questionable whether the commission would give its blessing.
“It’s dragged on for a little longer than expected, and I suspect that that adds an element of doubt,” he said.
“But I would think that there is more chance of it going through than not.”
Singh said the key issue was the flexibility that the combined entity would have, relative to what they would have had as separate entities.
Contact Energy chief executive Mike Fuge. Photo / Supplied
“[Water] storage is the golden goose in the electricity market – the ability to store it and then redeploy that energy in a timely and more advantageous way.”
He said the question would be whether the tie-up would allow Contact the ability to take advantage of optimistic pricing within the market, because of lesser competition, or not.
Singh said Manawa, as a generator-only and now shorn of its retail arm, faced a tricky earnings outlook because of the current dry spell, which looks to be getting worse.
The company now sees lower 2025 earnings as a result of the very dry weather so far this year, combined with wind volumes acquired via power purchase agreements being materially lower than the long-term average.
It now expects normalised ebitdaf for the March 31 year to be in the range of $80m-$95m compared with a previous guidance of $95m to $115m and down from ebitdaf of $145m in 2024.
Singh said Manawa showed that the generation-only business had its risks.
“And on the other side, you have seen the retail-only businesses taking risks on the spot market and finding themselves in a bit of trouble.
“Clearly, the integrated model provides more stability,” he said.
On the Commerce Commission’s decision, there could be a middle ground.
“It’s not uncommon for deals to be blessed on the caveat that certain assets are disposed of.
“It’s not necessarily a black or white outcome – it could be ‘yes but’ as well.”
Contact, in announcing the proposal late last year, said the combined group would help accelerate investment in renewable energy.
At the time, chief executive Mike Fuge said: “With our diversified and complementary portfolio across the North and South Islands, this proposal will enable Contact to sell larger volumes of fixed price electricity contracts over longer periods into the wholesale market.”
The companies’ hydro power stations generate higher amounts of electricity at different times of the year.
Contact’s South Island hydro power stations produce more in the summer following the snow melt, while Manawa’s hydro assets in the North Island catch more rainfall in the winter.
The deal would involve Contact acquiring 100% of Manawa via a mix of Contact shares and cash.
It has the support of Manawa’s majority shareholders Infratil and TECT.
Overall, Manawa shareholders will own 18% of Contact Energy once the transaction is completed.
If it goes ahead, Manawa’s chairman, Deion Campbell, will join the Contact board.
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector, and energy. He joined the Herald in 2011.
