Meridian shares dip after sale of Australian business comes in below expectations

Meridian Energy West Wind farm, near Wellington. The company, 51 per cent owned by the Government, has announced the sale of its Australian business. Photo / Supplied

Shares in New Zealand's largest electricity generator hit a fresh 12-month low after the sale of its Australian business came in below what analysts had been expecting.

On Monday morning Meridian Energy announced it had sold its Australian business to a consortium including oil giant Shell for A$729m ($753m), with the final price dependent on the timing of completion, expected to be in the first quarter of 2022.

Shell is buying the retail business, Powershop Australia while Infrastructure Capital Group would own its generation assets. As well as the Mt Mercer and Mt Millar wind farms, Meridian Australia owns three hydro stations, Hume, Burrinjuck and Keepit, and a number of development assets.

Meridian chief executive Neal Barclay said in a statement that the sale was "an outstanding result for Meridian's shareholders and a testament to the quality of the Meridian Energy Australia business and the employees who have been dedicated to its success".

A spokeswoman said the sales price represented a premium to Meridian Australia's indicative book value of around 50 per cent, and was 21 times Meridian Australia's 2021 earnings.

The sale did not give a boost to Meridian's share price, which has already been drifting lower as the outlook for higher interest rates hits dividend paying companies.

Just after midday, Meridian's shares were down 1.2 per cent to $4.57.5, the lowest level since July 2020.

In a note to clients, Craigs Investment Partners said the sales price was "well below what we thought it might go for in what has been an active M&A market in Australia".

The sale could see some of the proceeds returned to shareholders, which include the New Zealand Government, which owns 51 per cent of the company.

"Meridian will continue to consider capital structure, dividend policy and future opportunities for re-investment of the proceeds as settlement of the transaction approaches. A further update will be provided at the company's interim results presentation on 23 February 2022."

Craigs said the sale left Meridian in a position to pay a special dividend, "but at this stage we think is it is unlikely" given uncertainty over the future of the Tiwai Point aluminium smelter.

Meridian typically generates more than a third of New Zealand's entire electricity consumption.

It is the second time Meridian has entered, then exited, the Australian market. In 2003 it purchased Southern Hydro, a business it sold in 2005 to AGL Energy.

Then in 2018 Meridian bought its current Australian hydro stations from TrustPower, which had demerged Tilt Renewables and was selling its remaining Australian business to focus on New Zealand.

The sale includes a number of conditions, including Shell receiving approval from the Australian version of the Overseas Investment Office.

Flux Federation, a Meridian subsidiary which supports Powershop Australia's retail business, will continue to work with the new owners of the business for at least three years, Meridian said. Flux has a call centre based in Masterton.

Flux is excited at the prospect of partnering with the new owner of Powershop's business in Australia, Shell, and the opportunities that may be pursued together in the future.

"With emissions the problem, and renewable energy the solution, the buyers are readying to invest heavily in a cleaner future," Barclay said.

"The Meridian Australia team will be at the heart of a transformation that is not only good for Australia, but also the planet."