Govt work on loyalty scheme in SOE float

One of Mighty River Power's geothermal power stations, which may soon be partially owned by private investors. Photo / NZ Herald

Investors planning to "stag" the proposed partial sharemarket floats of four state-owned enterprises will have to think twice if the Government takes its cue from Queensland, which introduced a shareholder loyalty scheme when it privatised rail company QR National in 2010.

Market sources said the Treasury had taken a close interest in the Queensland Government's float of QR National because there had been few other privatisations in New Zealand or Australia in recent years to provide any benchmarks or guidelines.

Stagging - which involves investors selling their newly acquired shares at a premium to their issue price on the day the company lists on the stock exchange - is common in both markets.

The New Zealand Government plans to partially privatise, under its so-called mixed ownership model, Mighty River Power, by the third quarter of this year.

It also plans to introduce the 51 per cent/49 per cent Government/private model to Genesis Energy, Solid Energy and Meridian, but the sequence and timing of these issues has yet to be determined.

One market source said Treasury officials had travelled to Queensland to quiz officials over the state's privatisation process last year.

QR National is the world's largest rail transporter of coal from mine to port for export markets. The company serves most of Australia's coal producers over more than 50 mine sites.

The Queensland Government, which was keen on QR National retaining local ownership, got around the stagging problem by introducing a loyalty scheme, which encouraged investors to stay on the share register for at least a year.

In 2010 the Queensland government sold a 60 per cent stake for A$4.6 billion. The price to institutions was A$2.55 a share while retail investors paid A$2.45 a share.

The scheme rewarded Queensland residents, who received one QR National bonus share for every 15 QR National shares held continuously since the IPO. The float of QR National, while controversial at the time, turned out to be successful for the then debt-laden Queensland Government and for investors alike. Today the shares trade at A$3.66 - a 49.4 per cent premium to the retail issue price.

But QR National had a lot of other things going for it, not the least of which was the opportunity to participate in what has turned out to be the greatest resource boom Australia has seen.

One fund manager said QR National was a good example of privatisation extracting a positive outcome for both the Queensland Government and for investors. "But it was as much to do about QR National as it was about the process," he said.

While the New Zealand Government's marketing strategy will be heavily weighted towards local investors, there will nevertheless be a foreign component to the privatisation process to establish what investment bankers call pricing "tension".

Once again, the Treasury is likely to look closely at the QR National experience.

While there were few doubts about the desirability of QR National as a business, there were misgivings among the local institutions as to its price.

Investment bankers talk of the importance of introducing price tension between the various interest groups in order to achieve the best possible price, which is why the SOEs will be actively marketed to foreign investors, as well as to local institutions and individuals.

The Queensland experience resulted in a stand-off between powerful Australian institutions who baulked at the price. But thanks to the pricing tension between the domestic and foreign institutions, the offshore funds were happy to fill the void when the Aussie institutions stepped back.

"This [New Zealand] is a programme that is targeted at the domestic market, but it needs to be targeted at the offshore market as well," said one investment banking source.

This will involve the Government's chosen investment bankers conducting so called "roadshows" around the world.

In New Zealand's case, there are relatively few institutions of any size. The assets are likely to come to the attention of several offshore institutions, many of which have funds that specialise in investing in renewable resources that form an important part of Mighty River, Meridian and Genesis.

"They are important for price discovery and will help to keep the New Zealand institutions honest," said one market source.