KEY POINTS:
Two years ago, gas and electricity distributor Vector was something of a livewire.
The $600 million initial public offer of 25 per cent of its stock, the largest listing by a New Zealand company in six years, energised the market.
Its shares, issued at $2.38, hit a high of $3.37 just two weeks later.
Over the following months, it completed its acquisition of NGC, which on top of its purchase of UnitedNetworks in 2002 cemented its position as the biggest lines company in the country.
But its ambitions didn't end there.
That year the company won a contract to install electricity lines, gas pipes and fibre-optic communications at the Highbrook property development in East Tamaki.
"This is just the start," said chief executive Mark Franklin at the time, saying he wanted the Highbrook project to be a model for the future of Vector as an infrastructure manager.
Since then, Vector's share price has floundered, the company has suffered a bruising internecine run-in with the Commerce Commission, and political squabbling over the future of its majority stake has continued unabated. Shares closed at $2.62 yesterday.
When you add that to that a boardroom battle, reportedly over chairman Michael Stiassny's leadership style, which saw three independent directors take a walk last year, followed several months later by chief financial officer Peter Fredricson, Franklin's resignation this week doesn't look too surprising.
What did make some people sit up and take notice was that Franklin's departure was explained as resulting from a change in direction for the company. Having gone through a high growth phase, it was now entering a period of consolidation, Stiassny said.
Franklin's forte, according to Stiassny, was overseeing growth, and with the company now requiring consolidation, a different skill set at the top was required.
While Franklin publicly backed that up, given the company's recent history there was always going to be some speculation about his departure.
Franklin had reportedly complained to the company's independent directors about Stiassny's overly hands-on involvement in the company's day-to-day management.
According to the rumour mill, the pair had not seen eye to eye for about a year and his resignation, a few weeks after that of Fredricson was an unsurprising postscript to last year's troubles.
An informed source told the Business Herald the story that the company was past its growth phase was "just a smokescreen".
"This is all highly predictable. Michael and Mark had fallen out of love long before the three independent directors walked. It was only a matter of time before he got rid of Mark and now he'll appoint a yes man to do what he wants."
A local fund manager that owns Vector shares said most of the market was probably supportive of a change in chief executive
Putting the board issues aside, the fund manager, who did not wish to be named, described the company's management of its relationship with the Commerce Commission, a key concern for any monopoly infrastructure company, as "a total screw-up ... just appalling".
"As shareholder, you were sitting there going, 'Oh shit! What are these guys doing?' They totally, totally misread the Commerce Commission and just didn't seem to understand the commission is a very political body that's very focused on scoring votes, in a sense, from consumers."
Perhaps the biggest blow-up occurred last August when the commission announced its intention to take control of Vector's prices.
"Mark had been instrumental in managing that relationship with the Commerce Commission, he was 100 per cent convinced they had an excellent relationship and then 'bang!' that happened," the fund manager said.
"I guess both among institutional shareholders and the [Auckland Energy Consumer Trust, the majority shareholder] there's been a feeling that it's been a business that hasn't been particularly well managed, and it's a monopoly utility so it's hard to screw up in some ways.
"The most important things they can do is make sure they have a sensible relationship with the regulator and then keep their costs down."
Franklin had been a "reasonable" transitional manager in terms of bringing NGC and Vector together, "but I think what the market's now looking for is an individual who can just get on in a low-profile way and efficiently run a monopoly utility, build proper relationships with the regulator so there aren't too many surprises".
While the turnover of top staff would inevitably cause concerns in the market, the calibre of the appointed candidate would determine whether investors were comfortable or not.
"If they can get a high-quality candidate then I think people will start to feel a little more relaxed about the board changes. If the candidate is not of high quality or is an unknown, I think those stresses will bubble to the surface again."
As far as Franklin's successor goes, chief operating officer Simon McKenzie, who will be acting chief executive until the appointment is made, is generally credited as being a very competent industry veteran who did a good job smoothing things over with the Commerce Commission.
Other names in the frame include a couple from another listed infrastructure monopoly, Telecom. Chief financial officer Marko Bogoievski may be seeking new pastures after not being appointed to the top job at Telecom. Chief operating officer Simon Moutter, who is credited with doing a good job when chief executive of Powerco, has also been suggested.
Assuming Vector makes a confidence-inspiring appointment and achieves a satisfactory formal agreement with the commission, where will that leave it? A boring utility company with steady revenue, a meat-and- potatoes dividend payout but a sluggish share price performance?
Yesterday Stiassny, who declined to be interviewed, said via email that while the company was indeed entering a period of consolidation and looking to achieve maximum efficiency from its existing business, "this does not rule out growth, both organic and from new opportunities".
AMP Capital Investors head of equities Guy Elliffe said even Stiassny's comments earlier in the week did not necessarily indicate the company wouldn't pursue suitable growth opportunities.
"From a shareholder perspective there's regulatory and cost issues with the existing business and it's important that they're dealt with, but we do want managements to be opportunistic about investments that have got the ability to achieve investment rates of return above the cost of capital.
"I would see telecommunications as potentially one of those."
A former Vector insider told the Business Herald that until the end of last year there was "a whole raft of things in a growth sense" the company was looking at. "Certainly the message when it was floated was that this was an exciting vehicle, it would be acquisitive, it would be looking for more things."
The company had been looking at the possibility of installing more comprehensive fibre-optic telecommunications networks, a proposal that Finance Minister Michael Cullen was "hugely supportive" of.
While the company has made some relatively minor investments in that area, "that seems to have gone right on the back burner".
Forsyth Barr head of research Rob Mercer said such investments on the face of it appeared to make sense.
"Vector looked at its core business and said, 'How can we expand into other businesses using our network management competency? Where can we replicate that skill and look to grow our existing franchise?' "
Throwing some fibre-optic cable into the trenches dug to install or service gas pipelines must have looked like a pretty attractive proposition.
"Some of those ideas come across pretty easy on paper but perhaps it's occurred to them there aren't the necessary synergies in some of that," said Mercer.
In fact Franklin, who otherwise declined to comment on Vector's growth prospects, confirmed the company's fibre-optic plans were part of the $630 million investment programme shelved last year after the Commerce Commission's threat to take control of the company's prices.
Now the company's relationship with the commission is back on track, Vector's board has to decide how much of that investment programme, including fibre-optic, should go back on the table.
The Business Herald understands Vector's board had previously been looking at opportunities in the gas sector. While the company might be able to grow through buying other utilities, Mercer said, adding value through such acquisitions could be difficult.
"Getting bigger by acquisition doesn't necessarily add value, it depends on the price you pay for those acquisitions and what value you can bring to the acquired asset.
"I'm not sure that they're really in a situation where they can do that as an easy way of adding value."
