Contact's play for Manawa may not get over the line. Photo / NZME
Contact Energy’s $2.3 billion plan to buy Manawa Energy may struggle to get Commerce Commission clearance, a competition lawyer says.
If it goes through, the deal would be one of the biggest transactions the sector has seen since the listing of Mercury NZ (then Mighty River Power), Genesis and Meridian under the Government’s mixed ownership model in 2013 and 2014.
A successful takeover would make Contact the second biggest player after Meridian with 24% market share.
Under a proposed scheme of arrangement, Contact is offering shares and cash, valuing the target company at $1.86 billion.
With Manawa’s debt included, the total enterprise of the deal is $2.3b.
Manawa shareholders are expected to receive 0.5719 Contact shares for each Manawa share (the equivalent to $4.79 per Manawa share) plus cash of $1.16 per Manawa share.
They will end up with 18% of Contact if the deal goes through.
The deal values Manawa - which is 51% owned by Infratil - at $5.95 per share - a $1.92 premium to its last traded price of $4.03 before the plan was announced.
The scheme is subject to Commerce Commission approval, among other conditions, and is targeted for the first half of 2025.
The market is already concentrated and dominated by the big four, which are power generators and retailers combined (gentailers), while Manawa is solely a generator with just 4% of the market.
Michael Wigley, principal at Wigley and Co Solicitors, said the deal may struggle to get over the line with the Commerce Commission.
“Manawa is quite small but it is nevertheless material, and then you have got the gentailers, with about 90% of the market, so they really dominate the landscape,” Wigley told the Herald.
“One of the big questions is going to be whether you allow a generator to fold into a gentailer.
“There is concentration of market power and gentailers have strong incentives to look after their own retail markets.
“On the gentailers side, some would say that it’s a real problem in the market, and this will just make it more problematic with an independent generator folding into a generator,” Wigley said.
Contact would likely argue that joining forces with Manawa would create greater efficiencies.
Wigley said that given the dominance of the big four, the Commerce Commission may want to keep Manawa as a disruptor, particularly as it does not have a retail customer base.
“So the oligopoly is likely to become an issue here too - whether there is just too much concentration of power.”
Margaret Cooney, chief operating officer of the British-owned Octopus Energy NZ, said the Manawa proposal would be bad news for competition in the energy market.
“Market concentration has already been identified as problematic in the industry and this only compounds it, as there will be one less competitor in the market,” Cooney said.
“New Zealand urgently needs more competition and regulatory change to support better competition and investment in generation,” she said.
The power generators are in the political spotlight with big power users, such as forest products company Winstone, blaming recent high wholesale prices for putting them out of business.
Wholesale prices went over $800 per megawatt hour (MWh) last month but heavy rain and access to gas from methanol producer Methanex has seen the market do a sharp about face, with the wholesale price averaging just $49.30 MWh on Tuesday.
Contact’s chief executive Mike Fuge said August had been “entertaining”.
“We went from a period of extreme shortage and then suddenly, once we had signed up for the additional gas, the heavens opened up, so we have an abundance of energy now,” he said.
“I know that there has been a lot of blame placed on energy prices, but the reality is that we have gone from having the highest power prices in the OECD to the lowest because we have a free market in electricity, which ultimately drives investment in cheaper and clean electricity over the longer term.
“I think the name of the game now will be about building new renewable projects,” he said.
“There is only one Manawa, so now the name of the game is to get out and build.”
Contact said the combination with Manawa would create a more diversified, resilient and efficient Contact business with complementary hydro assets, able to offer larger volumes of fixed-price electricity to the market.
Major Manawa shareholders, Infratil and Tect Holdings (who between them hold or control about 77.9% of Manawa shares), have committed to vote in favour of the scheme subject to certain conditions.
Manawa – previously Trustpower – has 25 hydro schemes around New Zealand.
The company also has more than 1200MW of geographically diversified, secured development options in wind and solar.
Fuge said the companies’ hydro assets were complementary, with different seasonal generation profiles, which would help Contact to better manage dry-year risk and to sell larger volumes of fixed price electricity into the market than they could independently.
“Access to this type of hedging adds resilience and support for New Zealand’s large energy users and independent retailers to reduce their exposure to spot market prices in dry years,” he said.
Manawa chairman Deion Campbell will join the Contact board after implementation of the scheme.
Manawa is expected to contribute about $220m of normalised earnings before interest, tax, depreciation, amortisation and financial instruments to Contact.
The cash consideration and repayment of outstanding Manawa bank debt and bonds will be funded via new committed Contact bank debt facilities.
Manawa’s directors have unanimously recommended Manawa shareholders vote in favour of the scheme.
Craigs Investment Partners portfolio manager Monhandeep Singh said the offer was attractive.
“While this is a chunky premium, the Manawa share price has been in a five-year slide from a peak of around $9 per share,” he said.
Singh said Infratil will end up with a 9.5% stake in Contact and have another $180m come in the door if the deal goes ahead.
“Given Infratil has been raising equity in recent years to fund attractive growth prospects in the data centre and renewables space, the additional cash (while still maintaining exposure to the New Zealand electricity market via Contact) appears a good outcome,” he said in a research note.
Manawa last month advised it faced a sharply lower earnings forecast for the 2025 year after one of its customers defaulted on a payment.
Lower power generation conditions would also hit earnings, Manawa said.
The company said then it expected earnings before interest, tax, depreciation, amortisation and financial instruments (ebitdaf) for the March 2025 year to be in the range of $95-$115m.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
Legacy gas assets will give way to a focus on solar electricity generation.