Contact head must roll, say investors

Phil Pryke announces in Wellington that the proposed merger with Origin Energy has been abandoned. Picture / Mark Mitchell

Contact Energy deputy chairman Phil Pryke was last night facing calls for his head after the electricity generator and its largest shareholder, Origin Energy, ditched their controversial merger.

The deal, abandoned because key minority shareholders did not support the plan, is the second Pryke, as chairman of the independent directors, has unsuccessfully recommended shareholders accept.

In 2001 Pryke recommended a $4.25 bid from Edison Mission Energy. Then minorities said the bid undervalued the company - a call later vindicated by the rise in Contact's shares, which last night closed down 32 cents at $7.17.

"He should do the honourable thing and step aside," said Tyndall Investment Management's Rickey Ward, echoing calls from other large shareholders. Ward added that Pryke, at the very least, should put himself up for re-election at Contact's annual meeting.

He and other investors wanted Origin to offer more to compensate for the risks of exchanging Contact's relatively stable profits with those produced by higher risk oil and gas exploration activities.

Des Hunt of the Shareholders Association said: "[Can] the independent directors be trusted to act in the interest of the Contact shareholders? I feel they need to step down immediately and new independent directors be appointed."

Under the terms of the deal, Contact investors would have effectively swapped their shares for around a 25 per cent stake in ContactOrigin, formed by a contract between the two companies. Contact and Origin shares would have continued trading on the New Zealand and Australian exchanges. ContactOrigin would have been the largest integrated energy company in Australia, with 2.6 million customers and A$5.5 billion ($6.7 billion) of sales.

Pryke said minority shareholders should still support him and fellow independent directors, Tim Saunders, chairman of the embattled carpet maker Feltex, and John Milne, a director of the New Zealand Wine Company.

"Since we listed Contact has had remarkable total shareholder returns ... I think independent directors who have been with management through this whole period can take some credit with management."

Minority shareholders did not fully appreciate the gains that would come from the merger. Origin's expertise in oil and gas exploration would help Contact find new sources of fuel for its generators as New Zealand's reserves dwindled. The deal would also reduce Contact's reliance on New Zealand.

"We are very clear there are limits in the extent to which we can pass on increases in gas costs in our market. We are very clear on the constraints around Contact in terms of its ability to grow in this market," Pryke said.

Minorities also wanted an improvement in the terms of the deal and Origin was adamant it had put enough on the table.

Pryke said a planned Accident Compensation Corporation court challenge, disclosed by the Business Herald earlier this week, and the impending delivery of an independent analysis of the plan by broker and investment bank First New Zealand Capital, had no bearing on the decision. First New Zealand had completed a draft analysis of the proposal. However this would now be withheld from investors. Contact would now begin a "root and branch" review of the company's prospects.

Origin chief executive Grant King said his company decided to walk away at its regular board meeting earlier this week. Origin decided it would not be able to convince minority shareholders and decided that continuing with the merger would be a waste of time and money.

"We believe we put a very fair proposal on the table ... time will judge whether the proposal we put was reasonable. One does not walk lightly from the effort that both Contact and Origin have put in."

UNDER FIRE

Contact's independent directors

PHIL PRYKE
Deputy chairman of Contact Energy. He was chairman from its establishment in 1995 until October 2004 when Grant King was appointed chairman. He is also a director of Macquarie Goodman and Macquarie Goodman Property.

TIM SAUNDERS
Elected to the board of Contact Energy in 2000, but held a seat from 1995 until 1998. A consultant at corporate advisory firm Northington Partners. Chairman of Feltex Carpets, Solid Energy and a director of Capital Properties and Pyne Gould Corp.

JOHN MILNE
A director of Contact Energy since the company was established in 1995. A director of Grove Mill Wine Company and The New Zealand Wine Company Ltd, and chairman of the He Huarahi Tamariki Trust. He is also a chartered accountant.