Merger to give Contact more clout

Grant King (L) and Phil Pryke at the announcement of the mergetr in Wellington yesterday. Picture / Mark Mitchell

Contact expects the merger with Australian parent Origin Energy to give it the size and financial clout needed to secure vital gas supplies for its power stations.

The planned merger, announced yesterday, will be the New Zealand Stock Exchange's first example of a dual-listed company, in which two listed companies merge operations but keep separate legal identities and stock exchange listings.

Contact has been concerned for some time about the big risk it faces if it cannot get enough gas to fuel its power stations, driving up wholesale prices that would then feed into consumers' power bills.

Grant King, managing director of Origin Energy, which owns 51 per cent of Contact, said the New Zealand contract gas market had "absolutely, completely failed". This meant Contact needed to move "upstream" into gas exploration and production.

King said gas sellers had refused to offer long-term contracts, meaning Contact was a price taker and was only able to get gas when its sellers chose "to dribble it out".

This was a huge risk for Contact's shareholders in the medium term, which had "no seat at the table".

Origin had a lot of experience in the "upstream" sector and the merged company, with experience in the gas exploration field, meant shareholders would not be put in such a difficult position.

Origin chairman Kevin McCann said the company had been pleased with its investment in Contact but it had become clear that combining the two companies would create a much better energy business.

With a significant portfolio of growth opportunities, the merged company would help develop Origin's gas reserves and oil and gas exploration, help resolve fuel constraints in New Zealand and help fund developments in renewable energy.

McCann said a cash or share takeover offer for Contact was not viable, since takeover attempts had failed on previous occasions.

"Contact shareholders have previously shown no desire to lose the opportunity of investing in a major national energy business," he said.

Contact's former chairman and head of the independent directors, Phil Pryke, said Origin came to the board with the merger offer last year.

Origin's last offer to buy out Contact shareholders in July 2004 was made at a price below the present market price - since it needed only to get Edison Mission's 51 per cent stake to secure control of the company.

In 2002, Pryke and other independent directors advised shareholders to accept a $4.14 a share offer from Edison Mission for the 49 per cent of the company it did not own. Shareholders did not agree, keeping their shares, which have since soared in value.

Pryke was asked if the decision to merge was pre-empting any strategic, national decision about whether to start importing liquefied natural gas.

He said any decision to go down the LNG route would be a major capital decision.

"The ability to manage that risk across a wider portfolio of assets and interests in Australasia is far better within the dual-listed environment than taking it on on our own balance sheet," he said.

Contact chief executive David Hunt, a well-respected industry leader who took over the top job just last year, said his resignation yesterday should not be seen as any reflection on the merger deal.

He had been offered the job of running the New Zealand side of the business post-merger but had already decided to leave for personal reasons.

THE NEW COMPANY

* Australian energy giant Origin Energy will merge with Contact Energy, New Zealand's second biggest listed company after Telecom.

* The new company will be called ContactOrigin.

* The merged entity will have a market capitalisation of $7.74 billion and yearly operating profit of more than $1 billion.

* Known as a "DLC" (dual-listed company), it will be run by a common board and unified senior management team.

* DLCs "allow companies to expand across international borders while retaining their existing shareholder bases". Unilever, Rio Tinto and BHP Billiton are prime examples.

* This will be the first transtasman DLC.

* Each company guarantees the contractual obligations of the other company to creditors, creating a single credit pool and single credit rating for the group.

* Origin chief executive Grant King will be the new CEO.

* Contact's CEO, David Hunt, has resigned, citing personal reasons.

* Contact's S&P credit rating will increase from BBB to BBB+ after the merger.

WHAT IT MEANS FOR SHAREHOLDERS

* Contact will retain its NZX listing, while Origin will keep its ASX listing.

* Shareholders must approve the merger, but do not have to exchange or sell their shares.

* Origin shares and Contact shares will have the same voting rights and get equal dividends.

* It will be 75.7 per cent owned by Origin shareholders, Contact shareholders will own the remaining 24.3 per cent.

* To put this ratio into effect, bonus shares will be issued to Origin and Contact shareholders.

* Contact will pay out an imputed special dividend, comprising a taxable bonus issue of 7.3 shares per 100 existing shares and 5c a share in cash.

* Origin will "sell" its 51.4 per cent stake in Contact and no longer be a shareholder.

* Dividend payouts (now 80 per cent of Contact's profits) will be 60 per cent of the new group's profits.

* Approval for the deal is required from the Takeovers Panel, the NZX and the Overseas Investment Office. The "scheme of arrangement" for the merger will then be submitted to the High Court.

* An explanatory memorandum with merger details will be mailed to all Contact shareholders. This will include an independent appraisal report written by First NZ Capital.

* A shareholder meeting will then be held about four weeks later.