Editorial: Origin plan must be thrown out

Opinion

Contact Energy's minority shareholders have not been meek followers of trends during the company's relatively short but rarely dull existence. They have twice rejected takeover offers that would have seen Contact become yet another New Zealand concern sold to overseas interests at a knockdown price. Contact's subsequent share price performance has vouched for their wisdom. Now, they must vote on what amounts to another takeover proposal. This time, however, their verdict will have as powerful a bearing on this country's future energy framework as their own financial wellbeing.

Australia's Origin Energy, which owns 51 per cent of Contact, is proposing a merger by way of a dual-listed company structure, the first of its kind in this part of the world. The new entity, to be known as ContactOrigin, would be run by a common board and unified senior management team. Control of what is now New Zealand's second-biggest listed company would be exercised from Australia.

It is easy to see the attraction of Contact to Origin, especially in terms of access to strong cashflow. Contact's health was again illustrated on the day the proposed takeover was announced, when it reported a 57 per cent higher $146.6 million net profit for the December half-year.

The stability and strong prospects of a generating and retailing operation offer an attractive counterbalance to Origin's heavy involvement in the fickle business of oil and gas exploration.

It is far more difficult to see the benefit of Origin's proposal, either to Contact's 95,000 minority shareholders or to New Zealand. With considerable justification, Origin has been criticised for planning to take over Contact without paying a premium for control. Its response is that, based on shareholders' past attitude, a cash offer would not succeed. That, of course, might change if a fair offer was placed on the table.

In terms of the national perspective, Origin has sugar-coated its proposal by suggesting it would prompt more exploration in this country. With Maui gas due to expire early next decade, Contact and New Zealand have a huge interest in the sourcing of future power station supplies. Yet this was known by Origin when it took its shareholding in mid-2004. The two companies are already strongly aligned, and there is little to suggest a takeover would heighten Origin's exploration activity.

Indeed, and most worryingly, it is making noises about the new source of supply being imported liquefied natural gas. Foisting that on the country may suit Origin's corporate agenda but it would be hugely unfortunate, not least for consumers. The price of LNG is inextricably linked to the international oil market. New Zealand would become dependent on that market for the generation of domestic electricity, with all the pricing and exchange rate turbulence that involves.

A plumping for LNG could also foreclose investigation of domestic answers to the energy sourcing quandary. Out of the picture would be the likes of South Island coal using modern clean technology, wind power and other sources of renewable energy, and more intensive exploration for gas. These possibilities, individually and as part of a co-ordinated strategy, merit serious consideration before the risks and expense implicit in LNG are embraced.

New Zealanders have long been cosseted by Maui gas. The importance of the replacement strategy can hardly be overstated. It is not one that should be made on the basis of corporate profit. Origin's takeover proposal bodes ill for this country. It also offers nothing to Contact shareholders. It should be rejected.