KEY POINTS:
Contact Energy has bought Rockgas from its Australian parent Origin Energy for more than four times its value when Origin took over the LPG company three years ago.
Contact will pay $156 million for Rockgas, which supplies 90,000 tonnes of LPG (liquefied petroleum gas) to 40,000 automotive, commercial and domestic users each year, making it the biggest LPG supplier in the country with about a 50 per cent market share.
Origin, which owns 51.4 per cent of Contact, bought the 50 per cent of Rockgas it did not already own from Caltex in March 2004 for $17.6 million, implying a price of $35 million for the whole company.
Contact chief executive David Baldwin said his company had paid "a full but fair" price for Rockgas which was virtually debt-free.
Baldwin said he was not aware of the details of the transaction with Caltex, but said the price Origin paid for the half-stake in Rockgas three years ago probably included debt.
Contact paid 9.5 times earnings before interest, tax, depreciation and amortisation, which compared well with similar transactions in Australia.
As the transaction was with a related party, Contact appointed a committee of independent directors to oversee the acquisition and commissioned an appraisal of the sale price by PricewaterhouseCoopers, which found it to be fair.
Baldwin said prospects for the LPG market were now much brighter than a few years ago. Fears that demand for the gas would slump as prices rose through the depletion of cheap Maui supplies had proved unfounded.
While Rockgas now sourced much of its LPG from overseas at higher prices, largely via supply contracts with Origin, prices for other forms of energy including electricity had also risen sharply, which had maintained LPG's attractiveness to consumers.
The company was also more valuable now because of its investment in LPG reticulation or lines, mostly in Christchurch, Queenstown and Wanaka.
"It's actually quite a different business looking forward today than what it was a few years ago."
However Baldwin said Contact's primary interest in Rockgas was the opportunity it presented to develop and maintain its own 580,000-strong customer base by offering them more choice in fuels.
At present just 80,000 of Contact's customers can access gas through pipelines. Rockgas primarily supplies LPG via bottles.
"The price is full but fair, but when you layer on what the cross-selling potential is into electricity into their customer base and LPG into our customer base, that's where the value really starts to be quite compelling."
Should the company succeed in cross-selling to 2000 customers a year, "you end up with a valuation in the $175 million to $180 million range. If our team doesn't target 10,000 a year then I'll be disappointed."
ABN Amro analyst Daniel Kieser said the deal was "quite a neat little acquisition".
"At first glance it won't be terribly revenue or value accretive in the first instance ... but it certainly does make sense. It's not out of left field, it fits quite nicely with the rest of the business model."
Baldwin said Contact had been looking to enter the LPG market for some time. Initial discussions with Origin over Rockgas were put on hold when the companies unsuccessfully attempted to merge early last year.
Since then Contact had also cast an eye over Shell's LPG distribution business which is now to be sold to BOC, but had decided the business was too small.
Baldwin said Origin were "reluctant sellers" of Rockgas. "It's a good business, we had to work pretty hard to bring it out from their umbrella."
Contact shares fell 4c to $8.80 yesterday.
Expanding gas
* Contact Energy has bought leading LPG company Rockgas from Origin Energy for $156 million.
* It says the purchase presents compelling opportunities to cross-sell gas and electricity to its own 580,000 customers and Rockgas' 40,000.
* The Rockgas acquisition will allow Contact to supply gas to half a million customers who are not connected to natural gas line networks.
