Swords out for Contact heads

Contact Energy director Tim Saunders (standing) and deputy chairman Phil Pryke face the music. Picture / Kenny Rodger

Contact Energy independent directors yesterday faced down investors at the electricity generator's heated annual meeting, but it is not clear if they won.

During often-combative addresses to a packed Ellerslie convention centre, Tim Saunders, John Milne and deputy chairman Phil Pryke sparred with large and small investors over the failure of an $8 billion merger between Contact and its majority shareholder Origin Energy.

Shareholders said the directors should quit because they had failed to maintain their independence from Australian-based Origin during merger talks.

The directors in return variously blamed "uninformed"' and "unquestioning" media and a small "vocal", "emotional" minority of shareholders for the failure of a deal which they still maintained would have been in the best interests of shareholders in the long term.

The results of resolutions to sack Pryke, Saunders and Milne and to introduce tougher corporate governance are due today. But they are unlikely to pass because of Origin's controlling interest.

The attack came as Contact's new chief executive, David Baldwin, warned that full-year earnings would probably be "materially lower" than last-year's record $280.9 million.

He also disclosed plans to start costing a new power station at Otahuhu in South Auckland.

Contact's shares closed down 16c at $7.19, also amid disappointment the generator gave little new indication on the prospects for a long-hoped-for special dividend.

Des Hunt, representing the Shareholders Association, which had put forward the three motions to remove the directors, led the charge. The directors' support for the merger was out of step with minority shareholders, he said. Or, if the proposal was as good as the directors said, they failed to properly communicate it to shareholders.

"[The independent directors] have failed either way," Hunt said.

"Unless there are changes it will be difficult for the company to gain the support of the investment community. That will impact minority shareholders."

Shareholder Graeme Bulling said it was wrong for the independent directors to blame the media and a minority of shareholders for the failure.

The deal was not put to shareholders because Origin "pulled the pin".

Origin backed away from the plan in June after a poll showed Contact's top investors were not - in the words of Origin chief executive and Contact chairman Grant King - "there on value".

Bulling also said Pryke was wrong to lay claim for the performance of Contact, especially since he and the other independent directors had recommended a $4.25-a-share takeover offer by Edison Mission Energy in 2001.

"Your record of recommending Edison Mission Energy should have alerted you to your limitations in [estimating] shareholder value and financial analysis," Bulling said.

Meanwhile, Brook Asset Management chairman Simon Botherway called on shareholders to vote on resolutions to ensure against conflicts of interest on the Contact board.

He said as Origin was a potential supplier of fuel, Contact had to put in place more robust governance mechanisms. It also had to employ Baldwin as CEO directly. Baldwin is currently seconded from Origin.

Botherway said shareholders should see through what he described as the board's "technical arguments" against his resolutions.

Pryke, who led the committee of independent directors examining the Origin merger plan, said it would have been wrong for the independent directors not to promote the proposal because they were active participants in the development of the plan.

He said the debate was dominated by a small group of vocal shareholders who did not have the information to reach a conclusion on its merits.

"This is the sad state of New Zealand equity markets. An $8 billion deal to create one of the largest companies in Australasia was canned because of entrenched views, open hostility and so-called shareholder activism."

Chairman Grant King said the independent directors would remain in office until they were required to offer themselves for re-election. Removing any director midway through a term was an extraordinary sanction, implying a behaviour that warranted removal.

The directors had not behaved in such a way. He said the three directors had been endorsed by an overwhelming majority when they last stood for election.

Origin had abandoned the merger because "the majority of Contact's top shareholders were not there on value." He said the proposal had stood the test of time as the relative values of both Origin and Contact reflected the ratios proposed in the merger.