Origin rewarded for its patience

By PAUL PANCKHURST

It was the deal that everyone wanted to do. The way the Business Herald put it last November was: "Those New Zealand investment bankers making periodic trips to Los Angeles ... we don't think they are visiting Goofy at Disneyland."

No, they were at energy giant Edison Mission Energy, trying to get in on a billion-dollar deal - the sale of a 51.2 per cent stake in New Zealand's third-largest listed company, Contact Energy.

The bankers' game was lining up potential buyers.

There was one entertaining encounter for the deal-makers from Downunder.

The story doing the rounds is that, as this month's deadline neared, teams from rival Australian bidders Origin and AGL visited Edison in Los Angeles, secretly and separately but at the same time, bumping into each other at the Qantas lounge at LAX.

Everyone was getting the same flight home.

The deal announced this week saw Australian energy company Origin agreeing to pay $1.675 billion for Edison's controlling stake in the company that owns 10 New Zealand power stations.

On Tuesday night, Origin head Grant King, 49, was in a novel position: winning bidder.

Origin is known for usually being the bridesmaid, rarely the bride.

Quizzed by a news agency reporter on the price, King said: "We've paid what we've paid. It is unusual for us to be in that position - we don't have a history of winning these processes."

This time was different.

The whispered speculation is that rival AGL's bid was significantly lighter than Origin's $5.67 a share, although that is far from confirmed.

The deal-maker that came up with the funding package that helped Origin to snare Contact was Deutsche, the investment bank with roles in a string of transtasman corporate deals.

The story of the Contact deal is partly told in code words.

Project Rembrandt was the grandiose name of Edison Mission Energy for a global sell-off of 14 power projects in 10 countries.

Edison needs the cash to pay off huge debts incurred during the 1990s.

The company had become the cornerstone shareholder in Contact after the Government decided in October 1998 to float a bundle of former Electricity Corporation assets.

Eight months ago, Edison announced the appointment of advisers Lehman Brothers and Credit Suisse First Boston for the sell-off.

Chief executive John Bryson said "some or all" of the company's international operations would be sold to help pay US$3.4 billion (NZ$5.3 billion) of debt maturing at the end of this year.

The assets included investments in power projects Loy Yang B in Australia and Paiton in Indonesia, plus more in Turkey, Britain and Italy.

After deducting the debt attached to individual assets, the Contact shareholding was the single most valuable chunk of the portfolio.

A complication for would-be deal-makers in Australia and New Zealand was Edison's desire to sell the assets in one block.

However, the company was also open to regional bids - and bids for just Contact.

The possibilities were kaleidoscopic and had been on the minds of deal-makers in Australia and New Zealand for years after the rolling blackouts of the California power crisis of 2000-2001 had people wondering if Edison might cash up here. Edison's Southern California utility was hit hard by the crisis.

Although that business was ring-fenced within Edison, its woes were symptomatic.

In 2001, Edison tried to secure 100 per cent ownership of Contact and the company's strong cashflows.

That takeover failed and market watchers saw the asset as never far from being in play as Edison suffered from issues such as a slump in wholesale energy markets and falling power plant values.

As far back as three years, Origin was an obvious candidate for a merger - but not big enough to swallow Contact.

The Australian company was split off from the 50-year-old conglomerate Boral in 2000 under the leadership of King, a former AGL executive.

He was described at the time as taking on "one of the toughest jobs" in Australian business, with Origin then reporting a meagre four per cent return on assets.

However, King was an enthusiast for the company's mix, unusual in Australia, of what the energy business calls "upstream" and "downstream" assets - from oil and gas exploration to generation, network management and retailing.

The company became a success story.

As its share price climbed steadily over the following years, Origin put on the muscle that made it look more and more able to handle a Contact-sized deal.

However, when Edison finally put the stake on the block, there was still one big stumbling block.

The big issue for Origin - market capitalisation $4.3 billion, net assets $2 billion - was the requirement under New Zealand law to make a full takeover offer when buying a 51 per cent stake.

Origin is bidding at $5.67 per share - a price that is below market.

Edison has agreed to accept, but Origin must make the same offer to other shareholders. None are likely to accept but Origin must still have that money available - a whopping wedge of cash.

To make the bid, the company needed an extra $1.1 billion to $2.7 billion of additional funding - depending on shareholder acceptances.

But it did not want to raise money probably not needed and it did not want to make a share placement at a big discount.

It also, presumably, needed to stay within banking covenants.

Investment bank Deutsche Bank stepped into the breach. It brought its own balance sheet to the deal, subscribing for $1.3 billion of CUPS - convertible undated preference shares - in the company.

That - and bridging finance from Citigroup and Westpac - got Origin home.

The risk for Deutsche is if markets collapse and it is left holding a not-so-valuable and screaming baby. However, as one investment banker put it: "No doubt they are being richly rewarded for that."

One of Edison's requirements was for unconditional offers.

In the end, Origin's offer was clean except for one thing - a requirement for Takeovers Panel approval for Edison to sell its New Zealand holding company rather than its Contact shares.

All over Auckland, investment bankers are looking for the next deals to be done in an energy sector that is rapidly being remade.

Hmmm, Powerco. Hmmm, NGC. Hmmm, what about that Vector?