Gas Light deal seen as too dear

Australian Gas Light, the nation's biggest energy utility, may have paid too much for hydropower and wind energy producer Southern Hydro, based on a comparison with similar deals, analysts, including Merrill Lynch, said.

The A$1.43 billion ($1.52 billion) price equates to a 2004 multiple between enterprise value and earnings before interest, tax, depreciation and amortisation (ebit) of 34 times, Merrill said in an October 31 report. That compares with 19.7 times for the A$788 million takeover of Pacific Hydro and 9.7 times for Origin Energy's takeover of Contact Energy Ltd., it said.

AGL said on Monday it would buy Southern from New Zealand's Meridian Energy in advance of splitting the company between energy generation and sales, and energy transmission. The two businesses will have a total value, including debt, of about A$9.5 billion once the Southern acquisition is completed, managing director Greg Martin said.

"Compared to historical acquisition multiples for similar assets, this acquisition appears to be priced on the expensive side," Sydney-based Merrill Lynch analysts Matthew Spence and Jennifer Lam said in the report. "It is hard to see how the premium is justified."

Shares in Sydney-based AGL, which on Monday rose 4.4 per cent to a record close of A$15.14, yesterday gained 4Ac to A$15.18. Merrill left its recommendation on the stock unchanged at "neutral."

Moody's Investors Service cut its rating on AGL to A3 from A2 and said the rating may be cut further because of the demerger plan.

The added value created by Australian Gas' split into two should outweigh the "full" price paid for Southern, Macquarie Equities said yesterday in a separate report.

Martin will step down as managing director on completion of the split. The chief executives of the two new companies have yet to be named.

- BLOOMBERG