Why Vector smart meter possible sale could raise billions - and how it should be spent

Vector's smart metering business is up for possible sale. Photo / 123rf

Analysts say Vector's smart metering business - up for possible sale - could be worth substantially more than the sum of its parts.

But if the company does see a windfall from a full or partial sale, one-time Entrust candidate and commentator Lance Wiggs has concerns about how the money will be spent.

On April 6, Vector revealed it had hired Citi for a strategic review of its smart metering business.

Shares, trading at $4.02 before the announcement, have risen steadily since and were recently at $4.36.

Forsyth Barr analysts Andrew Harvey-Green and Mark Robertson upgraded Vector from neutral to outperform in an April 11 note. The pair also upgraded their target price by 35c to $4.45.

The analysts said while Vector's smart metering business has a sum-of-parts value of $3.1 billion, the recent 50 per cent sale of Intellihub's metering business across the Tasman implies a market value of around $4.2b - a significant sum that's close to the lines company's total market cap ($4.36b at Thursday's closing price).

Intellihub operates about 1 million meters (and has contracts to install up to 1.7 million more). Eventual auction winner Brookfield bought in at a A$3.3b valuation. Brookfield's some-time partner Morrison & Co (the pair co-own Vodafone NZ) was reportedly one of several rival bidders amid a wider infrastructure spinoff craze.

At its half-year results briefing, Vector said it had 1.93 million "advanced meters" on its books - about 400,000 in Australia and the balance in NZ.

It said its metering unit had operating earnings of $86.0m in the first half of FY2022 (of total Vector operating earnings of $263.6m for the period) versus $83.1m for the first half of FY2021 (when total operating earnings were slightly higher at $273.8m).

"Vector has spent the past 13 years growing Vector Metering into a substantial and successful business. Our work is recognised by global organisations, including Amazon Web Services, with whom we have a strategic alliance," chief executive Simon Mackenzie said on April 6.

"In recent times, a number of highly credible organisations have made unsolicited approaches to us expressing an interest in partnering with us and investing in the New Zealand and Australia metering business. In this context Vector considers it prudent to assess options for its metering business," Mackenzie said.

"The question is then what to do with the proceeds. I would look to buy back the public shares and delist," says one-time Entrust candidate Lance Wiggs. Photo / Sylvie Whinray

Vector is 75 per cent customer-owned via Entrust.

Last October, Wiggs and fellow venture capitalist Rohan MacMahon made a run against longtime incumbents C&R in the election for five Entrust trustee positions - missing out in a vote that was closer than normal, if still beset by the usual low turnout.

"The gas business should be the first to go, as it clearly has a limited life and is in competition with Vector's primary role as an electricity lines company," Wiggs told the Herald earlier this week.

"The metering business is, strangely, essentially operated as a financial investment - as the data, which would be useful to the lines company, is provided to and owned by the gentailers and their clients rather than Vector." (Vector declined to answer questions on that point.)

"So it makes sense to exit that business."

What to do with the money

The question was then what to do with the proceeds, Wiggs said.

"I would look to buy back the public shares and delist, and then operate the business for the benefit of the consumers, with the aim to reduce overall energy costs."

He added: "That means being able to help households get solar, batteries and better in-home wiring to cope with it all. Vector can do this directly, but also work with government and non-government funders to provide house-level financing that is backed into the electricity bill. It means delivering regional-scale batteries, at-home EV charging, upgraded smarter on-street transformers and so on.

"Vector has the chance to own energy delivery for all transport in Auckland, and can invest to help us get there fast - and to make a lot more income along the way, which can be reinvested."

Wiggs said the worst-case scenario would be proceeds from a metering sale being used to fund an increase of Vector's annual dividend payout to customers - which he paints as a "bribe" from an operation that charges its consumers too much.

Vector declined to comment. Entrust did not respond to requests for comment.

In the April 6 filing, Vector's Mackenzie said: "The strategic review is expected to take a number of months. No decisions will be made until the completion of the process."

During the October election, Cairns told the Herald that C&R supports Vector's target to be net carbon zero by 2030.

"Vector is a front-runner in evolving New Zealand's energy infrastructure to deliver affordable energy in a commercial model, while delivering essential carbon reductions and returning profits back into the community," the Entrust chairman said.

Entrust required Vector to spend at least $10.5m per year on undergrounding and clean energy technologies, Cairns said.

The lines company's clean energy projects include its partnership with startup Evnex to coordinate home-charging of electric vehicles at off-peak times through the use of networked smart chargers

Vector shares were recently trading at $4.36. The stock is up 8.46 per cent for the year.