Contact shares surge to record high on promise of payout

Contact Energy shares surged 11c, or 1.7 per cent, to a record high of $6.53 this morning as investors drooled at the prospect of a big cash payout.

Contact's almost 100,000 shareholders are reported to be in for a large-scale cash return -- possibly up to $1.15 billion or nearly $2 a share. Contact shares were issued to the public in May 1999 at $3.10 each.

Market commentators are talking about a capital return, but how much and when is a matter of debate. Some consider it might happen this year, others not for another year.

Contact is flush with cash but might not have big capital-hungry projects for another three to five years. It might need another $500 million gas-fired power station, provided it secures a long-term gas supply.

The company will also require funding facilities for the importation of liquefied natural gas from about 2010.

A capital return to shareholders funded by debt might suit new majority shareholder Origin Energy of Australia, which could quickly clear a third of the debt (NZ$1.65 billion) taken on to buy Contact and strengthen its debt-to-equity ratios.

Analysis by investment bank First NZ Capital says "there is scope for a substantial return of capital to be an option considered by Contact Energy".

First NZ Capital estimates Contact could take on up to $1.15 billion of debt -- the "extreme scenario" -- to pay out shareholders.

Origin's share of that would be $589 million. That would double Contact net debt to total assets to 60 per cent from 27 per cent this year. Without a cash return, net debt to total assets would fall to 23 per cent by 2006, the investment bank says.

First NZ Capital says $589 million would be almost enough for Origin to repay most of the "convertible undated preference shares" it issued to Deutsche Bank to partly fund the $1.65 billion purchase of 51.2 per cent of Contact from Edison Mission Energy last year. Deutsche holds $662 million worth of the instruments.

In addition, a capital return could reduce the amount Origin might have to raise through a rights issue of its shares this year. It signalled such an issue when it announced the Contact deal late last July.

Taking on more debt would reduce Contact's overall capital costs and be beneficial for all shareholders, First NZ Capital says.

The best method seemed to be a straightforward cancellation of shares, which required approvals from the High Court and Inland Revenue, First NZ Capital says.

Some analysts think $1.15 billion cash return is on the high side and point to the conservatism of the company -- it has held its net debt to total assets ratio under 35 per cent in the past five years. Contact would want to keep some "headroom" and flexibility in its debt levels, they say.

Tower Group's portfolio manager, Paul Robertshaw, believes $1.1 billion is right at the top end.

He said there had been a massive asset revaluation last year, boosting equity in Contact by $550 million, giving scope for a capital return.

"You've got to weigh up whether they've got to fund an lng plant, whether they want to buy more gas, whether they want to build Otahuhu C (a power station)."

A capital return might restrain Contact's exploration activities.

"Some shareholders might view that as favourable as it's not a core activity for Contact per se, even though it is for Origin," Mr Robertshaw said.

Another analyst said if the company returned cash in the near term to shareholders it might have to call on them for funds when big capital-hungry projects loomed.

- NZPA