Scramble indicates premium on listing

This week's high in the share price of gas company NGC - $3.90 - implied that Auckland energy giant Vector would list on the sharemarket at a 19 per cent premium.

Or maybe it just showed that some people are desperate to get their hands on Vector shares.

The most likely reason the NGC share price has risen is that there are unlikely to be many, if any, Vector shares left for institutional investors after Auckland Electricity Consumer Trust beneficiaries, Vector bondholders, NGC shareholders and stockbrokers get their allocations.

Since Vector is likely to go into several of the major indices that set the benchmarks for institutions' investment performance, many will be loath to not hold Vector shares.

The market has seen the effects of such an index squeeze many times, such as when AMP listed or more recently when Kiwi Income Property Trust went into the MSCI index.

The share price is inflated as institutions jockey for position but falls away once they are set.

NGC shares hit $3.90 on Thursday compared with the theoretical $3.40 price Vector is offering for the 32.8 per cent of NGC that it does not already own. Vector will pay 78c in cash and $2.62 in Vector shares for each NGC share.

The nominal price of Vector shares in the company's prospectus is $2.38. A 19 per cent premium would see the shares trading around $2.83. Even at $2.38, Vector shares are not cheap compared with, say, Contact Energy, a similar company.

Vector's ratio of enterprise value to earnings before interest, tax, depreciation and amortisation (ebitda) is 9.4 times - higher than Contact's price before the Vector prospectus was issued.

Vector's ratio of price-to-earnings before amortisation is 17.7 times, assuming all NGC shareholders accept the offer. The gross dividend yield is a relatively low 7.2 per cent.

But someone buying NGC shares at $3.90 would end up with a 6 per cent gross dividend yield on their Vector shares.

Vector's offer of the equivalent of $3.40 for each NGC share is higher than Grant Samuel's estimate of NGC's worth in December of between $2.50 and $2.76.

Vector paid $2.91 a share for its NGC holding - the 66.05 stake bought from Australian Gas Light - but it was always clear it would have to lift its bid to take out the minority shareholders.

Vector's offer to other shareholders was accepted by hardly any, taking its total stake to 67.2 per cent.

Craig Brown, of Walker Capital Management, thinks that, even at $3.40 a share, Vector is paying far too much for NGC, as it also did when it bought United Networks.

The NGC share price "is ignoring investment fundamentals. It's driven by shortages of stock."

Brown also sees potential regulatory problems for Vector, particularly in light of rising electricity prices. He points to Australia, where regulators have come down hard on lines companies.

But other institutional investors do not share his view. Paul Richardson, of BT Funds Management, says while institutional buyers may be pushing up NGC shares, the sharemarket has risen about 7 per cent in the past month.

"There are plenty of more irrational things going on in the market than buying NGC shares."

He also recommends people take Vector's forecasts with a grain of salt since investors have a history of mis-pricing and under-estimating power companies. "You need to take a deep breath before you say these things are expensive."

Richardson, whose portfolio was over-weight in NGC shares long before Vector's advent, will not say whether he will be accepting the offer, although he does say: "The first rule of power companies in this country is don't sell."

Simon Botherway, of Brook Asset Management, agrees, saying views depend on estimates of Vector's long-term prospects. He thought NGC was worth more than the Grant Samuel valuation and would be happy to accept Vector's offer.

Rickey Ward, of Tyndall Investment Management, says institutions are not buying NGC for a one-day or one-week return and, at present prices, "all you're doing is paying the first day's stag".