Not much time has passed since the Government's Budget announcement that shares in Meridian Energy would be the next to be sold. Already, however, it should question the wisdom of that decision and whether a more suitable subject is sitting in its cupboard. Major disappointments with the part-sale of Mighty River Power, including now a share price that has dipped below the float price, have made the task of selling Meridian later this year significantly more difficult. So much so that the Government should put it on the backburner and turn its attention to Air New Zealand.
Meridian is the jewel in the state's power company crown. It has been estimated that the sale of 49 per cent will net the Government $3.25 billion, almost twice that delivered by Mighty River. But success, as measured by the aims of the Government's mixed-ownership model, will occur only if the part-float is well managed and is attractive to both mum-and-dad and more sophisticated investors. There are considerable doubts about both sides of that equation.
Because of Meridian's size, Labour and the Greens' proposal to set up a single buyer to purchase all electricity generation hangs particularly heavily over it. Its profitability would be most affected. This will continue to be a deterrent, particularly to the experienced investors who saw it as a reason for steering clear of Mighty River. Similarly, unless there is a breakthrough in negotiations, the uncertainty about Meridian's supply contract with the Tiwai Pt smelter's owner will continue to be a discouragement. In its last public pronouncement, Meridian said an agreement was "unlikely". Subsequently, Labour and the Greens have weakened its bargaining position.
Meridian's size creates other problems. The Government has promised at least 85 per cent will stay in local ownership. According to William Curtayne, of Milford Asset Management, that means at least 170,000 retail investors will have to buy Meridian shares to match Mighty River's retail ownership. Only 113,000 participated in the latter's part-float, despite 440,000 people pre-registering their interest.
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Clearly, the Meridian sales process would have to be considerably more appealing than was the case with Mighty River. Most broking firms were involved in the latter's float and, therefore, unable to offer advice. This created an information vacuum, a situation exacerbated by a prospectus not tailored to investors' needs. Remedying those shortcomings would help. So, too, would a bonus scheme more attractive than the one share for 25 up to a maximum of 200 bonus shares offered for Mighty River. This was seen to be of limited value by many prospective investors.
A more attractive scheme might persuade some to overlook the risks posed by Labour and the Greens and the Tiwai Pt smelter. But it would also eat into the Government's take. It would not want that bite to be too large. Alternatively, it could sell more shares to foreign investors. That, however, would trigger a substantial political backlash.
The best course would be to postpone Meridian until a number of factors begin to work in its favour. History and the buying behaviour of portfolio investors suggest that Mighty River's share price will improve. The Tiwai Pt situation should also become much clearer. What is obvious now is that this is an ideal time for selling down the Government's 73.4 per cent stake in Air New Zealand. The airline's earnings are flying high in an industry noted for its volatility and because it is already stock exchange-listed, there will be no need for a prospectus. It will fetch much less than Meridian but would be a far more straightforward proposition for a Government keen to keep the ball rolling.