Switch picked in power balance

By RICHARD BRADDELL utilities writer

Electricity retailer and generator TrustPower has been upgraded from a sell to a buy by sharebrokers ABN Amro, which believes there will be further consolidation in the power industry.

TrustPower has been seen as a potential takeover target for some months and industry sources think the recent spike in wholesale electricity prices may prove to be the catalyst for a change in the company's ownership.

They said the price changes would have brought home the riskiness of electricity trading to key shareholders, such as the Tauranga Electricity Consumers' Trust.

TrustPower's assets had value to a number of players, said the brokers, who have placed a discounted cashflow valuation of $3.80 a share on the company.

They said TrustPower's ownership had been uncertain throughout its history and it was possible to put "a ridiculously wide valuation range" on the company, depending on how this ownership was changed. TrustPower shares closed steady yesterday at $3.27.

TrustPower had a strong brand and 280,000 customers, but with only 5 per cent of New Zealand's generation, it had been caught out by spiralling wholesale electricity prices.

TrustPower spokesman Graeme Purches yesterday refused to confirm speculation that the company was close to spilling water at a dam in Taranaki because there was insufficient transmission capacity on Transpower lines to Wellington. But he agreed the recent market developments had refocused attention on TrustPower's ownership.

ABN Amro said a change of TrustPower's ownership was capable of changing the balance of power in the industry, particularly due to its "sticky" customer base.

"We believe that one of the builders of next generation plant will want to buy the TrustPower customers because they will provide an extremely important retail hedge.

"We believe the likely buyer is Contact Energy and the price will surprise the market on the upside."

They said buying Trustpower would enable competitors such as Contact or Meridian to "steal a march" or enable smaller players, Mighty River Power or Genesis, to graduate to the "big boys' table."

Speaking to the Business Herald ABN Amro analyst James Miller said that 27.9 per cent shareholder Infratil was now prepared to act.

"I think you've got a manager who has suddenly woken up and is getting very active and is pretty carefully sorting out its options," he said.

Infratil's acquisition of a further 1.5 per cent, taking the combined Alliant/Infratil stake to 46.8 per cent, and the grouping of the stakes in terms of the takeovers law, was a master stroke that should see the board appointed from their camp.

There was little support yesterday for the view that the balance of power between the company's major stakeholders would be tested at the annual meeting on August 30.

Mr Purches said there was no resolution for directors on the notice of meeting.

The voting agreement, which requires Alliant/Infratil and 20.5 per cent shareholder Australian Gas Light to support each other's nominations for directorships, does not expire until mid-December.