Edison fails to swallow Contact but wants to stay

By BRIAN FALLOW

Edison Mission Energy says it is happy to remain a 51 per cent owner of Contact Energy, after yesterday conceding defeat in its $1.3 billion bid for the other 49 per cent.

Acceptances of its $4.14-a-share offer fell short - by how much it will not say - of the level needed to take its stake to the 90 per cent level at which it could compulsorily acquire the rest.

As the offer was conditional on reaching 90 per cent, it has lapsed, leaving shareholders who accepted free to sell their shares to someone else if they can. The view among institutional shareholders, which hold around 20 per cent of the company, that Edison's price was too low has made this outcome expected for some time.

Edison's vice-president Asia-Pacific, Bob Driscoll, yesterday dismissed speculation that Edison would either mount a fresh bid or seek to sell out of Contact.

"We have no plan to make a second bid in the near term for Contact Energy," Mr Driscoll said. "Beyond that we have a policy of not speculating on our investment criteria or potential future investments."

He added that the logistics of complying with the Takeovers Code's deadlines and requirements in communicating with 125,000 shareholders had been complex. "It is not something we would undertake again lightly."

Edison remained happy with its 51 per cent stake, both the return on investment and its ability to exercise reasonable and appropriate influence on the company's management, Mr Driscoll said.

"We have no interest in selling whatsoever. We are long-term owners. We like New Zealand. We like Contact Energy."

ABN Amro analyst James Miller takes these assurances with a grain of salt.

Any asset would be for sale at the right price, especially one which might look peripheral when viewed from California.

And 100 per cent ownership would give Edison options in terms of taking out equity and replacing it with debt, options that it might well find attractive for tax or other reasons.

Mr Driscoll said: "We wanted to own 100 per cent of Contact in order to have the freedom to integrate it with the rest of our international operations."

He said later that by integration he did not mean that Contact would not have been run from New Zealand. "It is more to do with financing strategies and that level of integration."

Ratings agency Standard and Poor's yesterday reaffirmed its BBB+ long-term and A-2 short-terms ratings of Contact and removed it from credit watch.

But Standard and Poor's still rates Contact's outlook as negative, saying that although its cash interest and debt coverage ratios had improved as a result of last winter's very high electricity prices, the prospects for the medium and long term were less certain.

"The negative outlook reflects uncertainty as to how the proceeds from the high electricity prices will be used. If the proceeds were used to pay special dividends or to fund additional acquisitions in the next year or so, this would place additional pressure on Contact Energy's financial profile," Standard and Poor's said.

Mr Driscoll said Edison's price, which was sweetened in early November from an initial $3.85, had been deemed fair by both the independent appraisers, Grant Samuel, and Contact's independent directors.

"It's normal for buyers and sellers to differ on valuation. Ours is not influenced by short-term infrequent events like last year's winter power crisis."

At $4.14 it was at the low end of Grant Samuel's valuation range of $4.11 to $4.51.

Contact shares closed yesterday down 3c at $3.75.