KEY POINTS:
The proposed sale of Vector's Wellington electricity network and a possible bid for Contact Energy demonstrate that we continue to have major problems with the ownership of our large infrastructure assets.
Our main predicament is that we have insufficient domestic savings to purchase controlling stakes in our major companies. As a result, the control of many infrastructure companies switches from one overseas owner to another with the Wellington electricity network and Contact Energy being excellent examples of this.
TransAlta Utilities Corp of Canada purchased 49 per cent of Capital Power, the owners of the Wellington electricity network, from the Wellington City Council for $120 million in January 1995.
Later that year, TransAlta raised its stake in the NZX-listed EnergyDirect, the former Hutt Valley Electric Power Board, to 41 per cent and, in 1996, purchased the remaining 51 per cent of Capital Power from Wellington City Council for $123 million.
Thus local politicians in Wellington were happy to sell 100 per cent of their electricity network to Canadian interests but their political colleagues in another part of the capital vetoed a successful bid by a Toronto-based pension fund to purchase 40 per cent of Auckland International Airport.
In October 1996, EnergyDirect and Capital Power merged to form TransAlta NZ, a listed company that was 63 per cent controlled by the Calgary-based group.
In 1998, the NZX-listed UnitedNetworks, which was 79 per cent owned by Kansas based Utilicorp, purchased the Wellington lines business from TransAlta NZ for $590 million and, four years later, UnitedNetworks was the subject of a successful takeover offer from Vector.
The problem with Vector is that it has far too much debt as the Auckland Energy Consumer Trust, its 75 per cent shareholder, hasn't wanted to dilute its holding or contribute more equity.
Thus Vector has been forced to sell its Wellington network to Hong Kong-based Cheung Kong Infrastructure for $785 million because the NZX-listed company is too highly leveraged.
The sale price of the Wellington lines business has risen by 223 per cent - from $243 million to $785 million - since January 1995 while the benchmark stock exchange gross index increased by just 51 per cent over the same period.
Hence there has been huge increase in the value of the Wellington electricity network, in absolute and relative terms, as ownership has passed from the Wellington City Council to Canadian interests to United States owners to the Auckland Energy Consumer Trust and now to Cheung Kong Infrastructure.
Unfortunately, most of the gains have been made by the Canadians and Americans rather than New Zealand shareholders.
Surely there must be a better way for us to generate more value for domestic investors from the country's infrastructure assets?
Contact Energy listed on the NZX in May 1999 after the sale of a 40 per cent stake by the Crown to the United States-based Edison International for $5 a share. The remaining 60 per cent was sold through an initial public offering at $3.10 a share with 18 per cent going to Northern Hemisphere institutions, 14.4 per cent to New Zealand and Australian institutions and 27.6 per cent to the domestic public.
In 2001, Edison made a full bid for Contact at $3.85 a share, later raised to $4.14. This offer was unsuccessful.
In July 2004, Origin Energy purchased Edison's Contact stake, which had increased to 51.2 per cent, for $5.67 a share.
Under the Takeovers Code, Origin was required to make the same offer to all shareholders.
This offer was also unsuccessful.
Finally, in February 2006, Origin proposed a merger with Contact, which was again enthusiastically endorsed by independent directors. This was also rejected, partly because Contact shareholders had lost confidence in their independent directors' advice. Contact Energy was back in the news again this week when BG Group, formerly known as British Gas, notified Origin Energy that it intended to make an offer for all of the Australian company's shares at A$14.70 ($17.64) each.
This is relevant to Contact Energy because under Section 6 of the Takeovers Code an offer must be made to other shareholders when effective control passes from one party to another. A successful offer by BG for Origin would mean control of Contact Energy passed from the Australian company to the Reading-based group.
The first point to note is that BG Group is no stranger to New Zealand. In 1988, it reached agreement with the Crown to purchase 70 per cent of Petrocorp for $528 million but State-Owned Enterprises Minister Richard Prebble terminated the agreement and sold the stake to Fletcher Challenge instead. This sale agreement provided for the Crown to purchase a substantial shareholding in Fletcher Challenge.
This was the first in a long line of controversial and embarrassing government asset sale decisions.
Although there is a technical requirement for BG to make a bid for Contact Energy if its offer for Origin Energy is successful, this may be avoided in a number of ways.
The Takeovers Panel could grant an exemption as it has in the past. These include:
* An exemption granted in relation to Tranz Rail in 2001 when Canadian National Railway Co merged with Wisconsin Central Transportation, which owned 22.5 per cent of the NZ railway operator.
* When Normandy Mining, which owned 79.6 per cent of Otter Gold Mines, was acquired by Newmont Mining in 2002 the latter was exempted from making a bid for Otter.
* The panel granted an exemption in relation to Kidicorp when a merger was proposed between ABC Learning, Child Care Centres Australia and Peppercorn Management in 2004.
The other issue is the price that BG would offer if it is forced to make a bid. Unlike the Origin bid at $5.67 a share in 2004, no definite offer price for Contact Energy will be established through the BG Group bid for Origin Energy.
BG may decide to offer $9 a share or less or the panel could require an independent party to establish a price.
This may not be especially helpful for Contact shareholders because earlier independent appraisal reports have consistently undervalued the electricity generator. But there are a number of reasons why BG may prefer to sell out of Contact Energy. These include:
* BG seems to be attracted by Origin Energy's extensive gas reserves in Australia and it is the Sydney-based group, rather than Contact Energy, that owns a 50 per cent stake in the offshore Taranaki Kupe field.
* BG was treated badly by the New Zealand Government in 1988 and may have major reservations about our business practices and the Auckland International Airport saga could have reinforced these concerns.
If BG decides to sell, who will purchase Origin's 51.4 per cent stake in Contact and make an offer for the remaining shares as required under the code?
No domestic organisation has the financial resources to make an offer and overseas parties will be discouraged by the decision regarding Auckland International Airport. It is difficult to know whether the Government, which seems to make many of its decisions these days based on opinion polls, will consider a company that generates 25 per cent of the country's electricity and operates the Clyde and Roxburgh dams as a strategic asset.
The only issue we can be definite about is that the privatisation programme and the Government's overseas ownership rules have been totally inconsistent and have created great uncertainty for investors.
Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.
bgaynor@milfordassets.com
