Gaynor: Contact's tactics leave sour taste

By BRIAN GAYNOR

Contact Energy's annual meeting was a game of cat and mouse between several determined shareholders and equally determined directors.

The shareholders knew that they could not carry their resolutions but efforts to obtain a moral victory were thwarted by chairman Phil Pryke.

The Shareholders Association proposed that two shareholder resolutions be moved up the order paper. This was to counter the usual plan of dragging out the meeting so that shareholders were bored and hungry when the more contentious issues came up for discussion.

True to form, Pryke rejected the request and then spoke for 12 minutes. He was followed by chief executive Stephen Barrett who gave a 31-minute address that could have been shortened to half that length.

By the time the first shareholder resolution came up for discussion - the motion to restrict directors' retirement allowances - the meeting had been going for an hour and 40 minutes.

It went on and on and shareholders desperately tried to score a few winning points. But they were always on the back foot because Edison Mission holds 51.2 per cent of Contact shares. Its representative said he would vote for these shares.

Several times Pryke was asked to put resolutions to a show of hands but he refused. One of the minority shareholders' few victories was when Bruce Sheppard asked all shareholders who supported the resolution on directors' retirement allowances to stand. About 75 per cent responded.

Observers might ask why shareholders have taken an aggressive stance towards Contact.

The reason is that the Government aggressively promoted the company to the public and it attracted 225,000 new shareholders in May 1999. Since then, the company has taken an arrogant approach towards these shareholders and 106,400, or 47 per cent, have sold out.

Monday's meeting confirmed the dissatisfaction of minority shareholders, with 49.3 million shares voting against the board on the directors' retirement allowance.

Only 3.2 million shares, excluding Edison Mission, voted with the directors.

On the other shareholders' resolution, demanding restrictions on deals between Contact and related parties such as Edison Mission, the voting was 39 million shares against the directors and 14 million, excluding Edison, supporting the board.

Pryke and his fellow directors might have won Monday's battles but their attitude has done little to encourage New Zealanders to invest in the sharemarket.

UTILICO

There were some red faces when Utilico International announced last week that it suffered big losses on its ERG investment. This was just a few months after the company's new investment manager committed all of Utilico's funds to ERG convertible notes and ordinary shares.

It is a poor reflection of Utilico's corporate governance and raises questions on whether it has complied with Stock Exchange rules.

Utilico, then known as Infratil International, was listed on the sharemarket in May 1997 after the issue of 98.3 million ordinary shares to Infratil New Zealand shareholders on a one-for-two basis at 50c each.

The plan was to invest in infrastructure assets outside New Zealand. It had three directors: chairman Kevin O'Connor, Lloyd Morrison and Liberato Petagna.

Morrison and Petagna were associated with Morrison & Co, the company's investment manager, and O'Connor was also Infratil chairman.

Utilico made several unsuccessful investments and in 2000 its share price hit a record low of 24c, less than half the original issue price.

Several UK-based groups associated with Duncan Saville became big shareholders. Saville, who was also a director of Infratil and Morrison & Co, was appointed to the Utilico board in May 1999.

The board structure was hardly consistent with sound corporate governance.

Companies associated with Saville continued to increase their shareholding and held 48 per cent at the end of 2000.

Utilico has since sold all its investments and made three capital repayments:In December 2000, $19.7 million was returned through the cancellation of two shares, at 50c each, for every five shares held.

A further $19.7 million was returned last October through the cancellation of two shares, at 50c each, for every three.

Last December, seven out of every 10 existing shares were cancelled at 50c each and $6.2 million returned to shareholders.

Utilico has cancelled 92.4 million of its original 98.3 million shares and returned $45.6 million to shareholders. It now has only 5.9 million shares on issue and had a net asset backing of $1.01 per share before last week's announcement.

After the annual meeting last November, O'Connor, Morrison and Petagna resigned and were replaced by Charles Jillings, Paul Davenport and Terry McAllister.

Jillings is an associate of Ingot Capital Management, the investment adviser to several of Saville's group of companies. Davenport is a former Wellington broker and McAllister is Utilico's company secretary and a Morrison & Co employee.

Ingot Capital Management then replaced Morrison & Co as Utilico's investment manager. No details of the contract were disclosed.

The new directors and investment manager invested $5.54 million, out of Utilico's total investable funds of $5.96 million, in ERG convertible notes and ordinary shares. ERG is a Western Australia-based telecommunications firm that specialises in smart card applications and automatic fare collection systems.

Utilico holds two listed ERG securities - 334,084 ordinary shares and 100,000 7.5 per cent A$13.50 ($16.45) convertible notes - and one unlisted security - two million 8 per cent A$1.65 ($2) convertible notes.

On February 27, ERG issued a profit warning and on Monday announced a loss of A$199.4 million ($243 million) for the December six months. Its share price has fallen from a high of A$9 ($11) during the Nasdaq technology boom to 32Ac.

On March 7, Utilico told the exchange that its $5.54 million investment in ERG was now worth $4.82 million. The convertible notes can be converted into cash but the listed notes, which convert in October 2005, are trading at a 55 per cent discount to face value.



Why were shareholders not asked to approve the appointment of Ingot as investment manager when it is a related party?

Why were shareholders not asked to approve the investment in ERG when it represents 92 per cent of gross assets.

Why did Utilico invest in a highly speculative technology firm when its stated aim is to remain in the infrastructure sector?

Why did Utilico announce the ERG investments more than two months after they were made?

Who did Utilico buy the ERG investments from?

* bgaynor@xtra.co.nz