Battle for Contact draws to a close

By CHRIS DANIELS

The battle for Contact Energy is over, with Origin Energy yesterday declared the winner. The Australian company has trumped its rival AGL with a $1.68 billion, $5.67 a share offer to US owner Edison Mission.

Edison Mission is selling its 51.2 per cent Contact stake as part of a global asset fire sale, to raise money to pay off huge debts incurred during the 1990s energy bubble.

While Origin is required by law to offer the same price to all Contact shareholders as it is offering Edison Mission, the price has been set at such a level that it will succeed with Edison, but not with any other shareholder.

Just one day before the deal was announced, Contact shares were pushing $6 on the NZX. Institutional investors and analysts have previously valued Contact shares well north of $6 - with some estimates reaching as high as $7. They closed yesterday down 6c, at $5.88.

Before the deal can proceed, Origin needs a waiver from the Takeovers Panel, which it hopes will allow it to buy Edison Mission's local holding company rather than its actual shares.

If such a waiver is given, takeover documents will be sent to all shareholders, despite the offer having almost no chance of getting support.

Sentiment surrounding the deal in Australia and New Zealand is positive, as it gives stability for Contact's local shareholders and a complementary and potentially lucrative investment for Origin. The Australian company already has an oil and gas exploration business here in New Zealand, which is seen as a good fit with Contact, as it is keenly searching for new gas supplies to fuel its gas-fired power stations.

Origin's share price on the ASX closed at a record high after the deal was unveiled, up 5.9 per cent to $A6.14.

Wholesale changes at Contact seem unlikely and its popularity with retail and institutional investors is expected to remain following the sale of half of its shares to Origin. The Australian company has indicated its continued support for Contact's generous dividend policies.

Origin managing director Grant King said the deal was a complex one, because the company did not know how many shares it would eventually need to buy - 51.2 per cent, 100 per cent, or anywhere in between.

"It wasn't easy, but not because of a lack of goodwill, but it wasn't easy because it was quite a complicated transaction."

Origin executive director, commercial, Bruce Beeren accepted that the $5.67 price would not attract other investors.

"We have got into this investment on the basis that 51.2 per cent is a good investment for us - that being said, 100 per cent is always better than 51 per cent, we acknowledge that," he said.

"In terms of the pricing, it is not priced at the levels we think will be necessary to achieve 100 per cent acquisition, so we can't foretell the future, but we think that based on [Edison Mission's] previous attempt to acquire more than the 51 per cent based on the analysts' views of the value of Contact, we think it's unlikely that a large number of minority shareholders will accept the offer when it's made."

Origin is paying for its purchase through an issue of "Convertible Undated Preference Shares" and bridging finance. The shares, designed especially for the transaction, will be issued to Deutsche Bank, which organised the whole deal for Origin, and are regarded as equity.

Simon Botherway, of New Zealand investor Brook Asset Management, said Origin's "upstream experience" would be an asset for Contact. He said the $5.67 offer was obviously not one that interested Brook.

"If we were inclined to sell at $5.67 we would have already sold," he said.

Origin was likely to wait some time before launching a full takeover offer at a price that would interest all shareholders, said Botherway.

"Origin would struggle to swallow the whole thing, they would need to raise a significant amount of capital to take over the whole thing, so that would be well down the track I would think."

All going according to plan, Origin will take over full ownership of Contact by the end of November.