Editorial: Payback for pulling plug on merger

Contact Energy is an important property for this country, the only one of the four electricity generating companies that has to answer to investors in the private sector. Those investors yesterday saw off a rather devious takeover bid by the majority shareholder, Origin Energy of Australia, and their resistance should pay dividends for them and for the economy.

The merger proposed in February by Origin's board and Contact's three independent directors would have given Origin shareholders 75.7 per cent of the new company, compared with the 51 per cent that Origin holds in Contact, our second-largest listed company. The merger was, as New Zealand institutions quickly described it, "a takeover in drag". As a merger it required only 75 per cent shareholder support, rather than the 90 per cent required for a formal takeover, and it was originally intended to proceed without giving shareholders a choice. The unsavoury course was foiled in May when the Takeovers Panel refused to grant the directors a waiver of shareholders' rights.

They sought the waiver because Contact's New Zealand shareholders had refused previous takeover proposals that would have seen this country's only listed electricity generator leave the local sharemarket. The latest proposal promised a dual listing on the ASX and NZX but that has proved insufficient enticement to Contact's minorities who saw the benefits of a merger flowing largely one way.

The arrangement would have given Origin the strong cashflows and balance sheet from Contact's generating and energy retailing business while Contact might, or might not, gain from Origin's more risky oil and gas explorations. The search for a fuel source to replace Maui gas is certainly Contact's most urgent need, as it is for the country's electricity supply. But it has been hard to see that Origin's interest in prospecting here, or Contact's access to Origin's discoveries anywhere, would be enhanced by a full merger.

There was more reason to fear that Contact's interest in discovering or developing new domestic energy sources would suffer once it was fully absorbed in the Australian operation. Already Contact appears to be resigning itself too readily to importing liquefied natural gas when Maui expires.

While Contact's independent directors, Phil Pryke, John Milne and Tim Saunders, saw shareholder security in the merger with Origin, most of the minority shareholders saw only risk in exposure to the exploration and production of thermal fuels. Contact's stock price has largely tracked Origin's since the merger announcement in February, gaining 14 per cent since then but with less day-to-day stability.

The $8 billion merger has been called off in the face of court action mounted by the largest minority, the Accident Compensation Corporation, which aimed to raise the number of shareholder votes required to approve the proposal. With other shareholders lining up to support the challenge, Origin has withdrawn the offer.

Now the future of Contact's independent directors must be in question. This is the third time national investors have had to rally to keep the big energy company from an overseas takeover at low value. The penny should be dropping that local institutions and individual investors recognise the company's strategic position in the economy as well as its strong cashflows and dividends. It was being lined up, for some reason, for immersion in a company whose financial ratios and returns were not nearly as good. If Mr Pryke and his fellow independent directors are to continue to represent 94,000 New Zealand shareholders, they will need to revise their ideas drastically. It would be more credible if they were to resign.