Reluctant vendor's hard selling job

By CHRIS DANIELS

Dan Warnock, the affable chief executive of UnitedNetworks, has one of the more difficult jobs in New Zealand business.

As the representative of US energy giant and 70 per cent shareholder Aquila (formerly Utilicorp), Warnock spends most of his days showing potential buyers bits of the company they might like to buy.

But he believes it is in the country's best interests for UnitedNetworks to be left as it is.

Last Friday was the deadline for indicative bids from the more than 20 companies or consortiums wanting to take over the company, or get their hands on some of its $2.3 billion of assets.

Aquila is pulling out of its investment and handing over UnitedNetworks to whoever wants to pay the most, whether that means a total takeover, or breaking up the company into as many pieces as is needed to get top dollar.

All this puts Warnock in a difficult position.

He is serving his masters by trying to sell out for the biggest price, while hoping to preserve what he considers to be one of New Zealand's best companies.

He speaks of UnitedNetworks and its people with obvious affection, and shows his desire for it to eventually go to a buyer who wants the lot, rather than several organisations walking away with a slice - whether it be the electricity lines business, the gas network, or its fledgling telecommunications division.

The company, says Warnock, is worth more than the combined sum of its parts.

Skills developed and learned in the gas network are carried over into the electricity side, for instance.

"It would be great if the company could continue on as a whole," he says.

"But of course it's not up to me to make that call."

The company has a lot to offer, he says, being at the forefront of utility regulation in New Zealand and being a leader in the industry.

Warnock describes it as being creative, energetic, innovative and a company employees like working for.

"I think probably one of the most satisfying things beside the success itself is that employees in cultural surveys overwhelmingly love the company.

"Eighty to 90 per cent say 'we love working at UnitedNetworks', so that's really good news."

It is the 200 employees who make UnitedNetworks worth more than its assets, says Warnock.

They too would prefer it be sold in one piece, rather than broken up.

"I think it is because they built it up with their hands and of course you never want to see anything built up, pulled down into pieces."

Skills, intellectual property and "synergies" will be lost if the assets were split, , Warnock believes.

Another reason he does not want UnitedNetworks split up and fed in scraps to its rivals is his belief that the company - and the New Zealand energy network - is on the verge of a new bout of reforms, a new wave of "unbundling".

The first wave of unbundling has occurred across the globe. It started in New Zealand in the late 1980s and continued throughout the 1990s.

During this period, generation assets - the dams, wind turbines and power stations - were split off from the transmission and distribution side of the industry.

Then, in 1998, power companies were forced to choose between being a power retailer or a lines company with a monopoly in a local area.

No company could legally do both.

New Zealand was left with a small number of combined generator/retailers: Meridian, Genesis, Contact, Mighty River Power and Trustpower.

Distributing the electricity to homes are 28 local lines companies, of varying sizes, mostly owned by locally elected trusts.

Warnock says the next phase is now upon us. The lines companies will split up and focus on particular parts of the industry - asset ownership, asset management or service delivery, which would include contracted maintenance and upgrading.

"If Ashburton or whoever really wants to own those assets that they somehow feel is critical for them, then I think you say 'sure, let them own them'," says Warnock.

"But maybe it's better if we have a consortium to manage them."

He says New Zealand is far too small to have 28 lines companies, with an ever-widening gap between the big and the small in terms of efficiency and providing good service to customers.

Parochialism means many communities want to keep ownership of their local lines company - something that is fine within the vision of the next wave of unbundling.

"We have come to believe that you don't have to sell up your stake in the lines business, but what you do have to do is start co-ordinating your management services across a number of line companies.

"One thing we know for sure is that there are economies of scale in this lines business.

"We can prove that this is the case, and these companies need to pick up on those economies of scale so they can deliver some of these benefits."

As New Zealand's 11th biggest company by market capitalisation, UnitedNetworks says these benefits come from it owning 30,022km of electricity lines, 7098km of gas lines and 100km of fibre-optic cable.

It is clearly the largest lines company, with 492,000 connections to its electricity network, compared with the 266,000 of its nearest rival, Vector.

Warnock will not be drawn on the identity of those interested in buying UnitedNetworks, but says interest has come from at home and overseas.

"There are those overseas that want to buy it in its entirety, there are some here that want to buy it in its entirety, there are some that say they want to have a certain piece of our assets."

Local companies interested include lines company Powerco and NGC, which is interested in buying the gas network in Auckland, Hawkes Bay, Wellington, Horowhenua and the Manawatu.

Energy sector analysts expect a strong bid from Vector, the lines company covering Auckland City, Manukau City and most of Papakura.

The allure of extending its network over the North Shore and Waitakere areas seems likely to place it at the forefront of the bidding process.

Whether Vector, which is community owned, will want to spread its wings and also buy United's power networks in Thames, Coromandel, Bay of Plenty and the Wellington regions is not known.

It may choose to eventually sell them to some of the other lines companies, such as Powerco in Taranaki, which has confirmed that it will be involved in the bidding process.

Warnock, who will probably return to the United States once the company has been sold, says he wants to leave UnitedNetworks knowing he has done a good job for its people.

"The important issue for me is I have always stood on the integrity of UnitedNetworks and I've always stood on our employees' integrity," he says.

"My desire is to finish - whatever that means - in the right way with a solid company that has performed well and that hands over a solid company to whoever [the new owner] is."