Contact stake a bargain at $1.6b

By LIAM DANN

Australian energy company Origin bought its 51 per cent stake in Contact Energy at a discount of nearly $200 million, says an independent valuation released yesterday.

The Grant Samuel report - accompanied by an independent directors' recommendation that shareholders reject a full takeover bid by Origin - valued Contact shares at between $5.74 and $6.34.

Origin paid $1.68 billion - or $5.67 a share - for its 51 per cent stake.

Although the tender process for Contact was contested, the seller - California's Edison Mission - was committed to offloading its international assets to pay off debt, analysts said.

Goldman Sachs JB Were energy analyst Peter Sigley said Origin did not get the majority stake at a rock-bottom price, but the Grant Samuel valuation showed that it was a good deal.

The valuation was released by Contact's independent directors with an improved profit forecast of $143 million for the year to September 30 - up from $118.3 million for the previous year.

The directors also recommended that shareholders reject Origin's full takeover offer.

The latest offer of $5.57-per-share is the original offer price minus the 10c-per-share dividend paid in the interim.

It is below the market price, the Grant Samuel fair-value range and the range of a Cameron & Co valuation also released as part of the target company statement.

Origin is required by the Takeovers Code to make the full offer.

Analysts believe it is priced to fail and an improved bid is not expected.

Origin managing director Grant King said in July that he did not expect big numbers of Contact shareholders to accept the offer.

The company did not not respond to requests for comment yesterday.

Contact's chairman, Phil Pryke, said the offer did not reflect the company's strong position in New Zealand's gas and electricity markets.

As well as the strong profit forecast for the present year, there were good grounds to expect the business to achieve further earnings growth over the next few years, he said.

Rising domestic demand for energy would be one of the big drivers for Contact's growth, the Grant Samuel report found.

Forsyth Barr analyst Greg Main said the Grant Samuel valuation appeared to be on the conservative side but was within a range that the market expected.

The profit forecast looked good although it was important to remember that earnings this year would be affected by lower electricity prices.

Main said Origin was expected to bring some added value to Contact, although just what form that was in remained to be seen.

The outlook for small shareholders in Contact was looking positive and there was no obvious reason to sell, he said.

Contact shares dropped 13c to close at $5.90 yesterday.

Sigley said it was possible that the drop reflected high expectations around the valuation that had pushed the share price up over the previous few days.

The story so far

February: Contact's 51 per cent shareholder, Edison Mission, of the United States, announces plans to sell international assets to pay debt.

July: Australian company Origin Energy buys Edison's stake for $1.68 billion - $5.67 per share.

August: Origin launches a bid for the rest of the shares as required by takeover rules. The offer price of $5.57 per share is well below market. Analysts say the bid is designed to fail.

Yesterday: An independent report by Grant Samuel values Contact shares at between $5.74 and $6.39.