Edison tipped to lift Contact stake

By Mark Reynolds

Edison Mission Energy is expected to try to boost its holding in Contact Energy above 50 per cent as soon as a six-month moratorium on its buying extra shares in the company expires.

Edison would need to boost its holding in Contact above halfway to consolidate the company in its accounts and ensure it could use the New Zealand electricity concern as an expansionary vehicle, energy company share analysts said yesterday.

The likelihood of Edison wanting to raise its stake from the 40 per cent it now has is expected to support Contact Energy's share price once the company lists on the stock exchange later this year.

Edison surprised the market yesterday in winning the 40 per cent slice of Contact with its $1.21 billion bid.

That was about 25 per cent more than the most optimistic of forecasts.

The amount paid theoretically values all of Contact at $3 billion. But a premium was paid for the cornerstone holding because it is such an influential stake.
Even without the premium, Contact is now being valued around $2.5 billion, compared with less than $2 billion previously.

"In paying such a price they are really going to have to make the asset work for them," one analyst said.

"They are likely to want to get above 50 per cent of the company as soon as they can because they will need to ensure they can control [Contact's] boardroom and move the company in the direction they want."

Edison has no other assets in New Zealand, and therefore cannot bring the economies of scale to Contact that rival bidder TransAlta could have.

TransAlta has the largest retail base of any energy company in New Zealand, and would have used Contact's one-third share of the electricity generation market here to service those customers.

"Edison will have to look much more closely at the core operating earnings of Contact and expand them to ensure it gets a good return on its investment," the energy analyst said.

Edison is regarded as a sound operator in international energy markets.

It is a division of the Edison International electricity group. That company has 48 international investments, including power station operations in Australia, Britain, Indonesia, Italy and Thailand.

The parent company has expanded aggressively recently. It is, according to yesterday's Wall Street Journal, a short-listed bidder for a group of power plants being sold by Unicom Corp in the United States for more than $US5 billion.

Edison Mission had total assets of nearly $10 billion at the end of December, with shareholder equity of $1.8 billion.

The company's after-tax earnings rose 15 per cent to $US132 million in its December financial year.

Edison Mission specialises in the development and management of power generation facilities, and the acquisition of Contact will give it the opportunity to develop some strong power retailing skills.

Edison is also expected to use Contact's experience in the Australian electricity generation and trading market to develop its operations there.

In New Zealand, one of Edison/Contact's main competitors will be TransAlta.
TransAlta has more than 500,000 retail energy customers compared with Contact's 400,000-odd.

But Contact has one-third of the retail electricity generation market compared with TransAlta's 6 per cent.