Pace of technology change drove $441m Trustpower-Mercury retail deal

Trustpower has done a deal to sell its retail arm to Mercury. Photo / NZME

The rapid pace of technology, and the capital required to drive it, was the main motivation for selling Trustpower's retail business to Mercury NZ for $441m, chairman chairman Paul Ridley-Smith said.

The deal also involves Trustpower, which has a series of small to medium-sized hydro stations throughout the country, providing power to Mercury over the next 10 years, on a sliding scale.

Infrastructure investor Infratil, which has a 51 per cent stake in Trustpower, said it was supportive of the sale and intends to vote in favour of it at the company's annual meeting on September 22.

Ridley-Smith said last year's purchase by Australia's Origin of a 20 per cent interest in the UK's Octopus and a licence to use its market-leading customer platform, Kraken, was a sign of where the industry was going.

He expects to see more competition in the retail space from traditional and non-traditional players alike, with technology continuing to disrupt markets.

Trustpower's retail business is a multi-product utilities retailer selling electricity, gas, fixed and wireless broadband and mobile phone services to about 231,000 customers.

The combined business will have about 780,000 connections across both energy and telco services.

Ridley-Smith said Trustpower had shown the value of bundling products together, which had the effect of reducing churn.

"The challenge was how much we were prepared to invest in the retail business to make sure that we were the market leader.

"We concluded that scale was imperative to justify that investment, and that led us to think whether there were others out there thinking the same.

"Clearly Mercury is very similar.

"And we think that the combination of Mercury and Trustpower retail business will better adapt to the challenge than either could have done alone," Ridley-Smith said.

The deal, if approved, will mean Trustpower will surrender annual Ebitda in the late $40 millions.

Grant Swanepoel, director equity research at Jarden, said deal would bring much-needed industry consolidation.

"It's not often you get a deal where everyone thinks both parties won," Swanepoel said.

"There is some missing detail around who actually got the better outcome from this deal and it's all around the price of the generation power purchase agreement (PPA) that is being sold by Trustpower to Mercury.

"It looks as if Trustpower has locked in a fairly good PPA price through to 2027, which means its generation assets have a very certain earnings profile up until that time - that's extremely attractive to infrastructure investors," Swanepoel said.

Mercury NZ operates Whakamaru Dam. Photo / NZME

Ridley-Smith said utility retailing in New Zealand is highly competitive with many players, high switching rates, and multiple power providers.

"We don't see that backing off. In fact, if anything it's possible that there could be more, well-resourced competitors coming into the market," he told the Herald.

"Then you are seeing technology disrupting the markets. Some of it is consumer led.

"They want to know more about usage and they are more proprietary about their data - they want more choice of products.

"What that means is that you are constantly having to invest, otherwise you get left behind."

Ridley-Smith said the first three to five years will see Trustpower generating power exclusively for Mercury, meaning its cashflow will be reasonably predictable.

Post the sale, Trustpower's growth would come from investment in renewable energy.

"We won't be getting into retailing. We are done with that."

Mercury chief executive Vince Hawksworth said the acquisition would accelerate Mercury's retail strategy.

"Mercury and Trustpower are two highly complementary organisations, and this agreement would see the best of both being brought together for our customers," Hawksworth said.

Bringing together the two businesses would also allow Mercury to scale to make "meaningful investment" in the underlying IT systems, he said.

The sale - which is the result of a strategic review of its Trustpower's retail arm initiated in January - is conditional on Commerce Commission clearance, completion of the proposed restructure of Tauranga Energy Consumer Trust, which has a 26.8 per cent stake, and Trustpower's shareholder approval.