Editorial: Sweetener to shares leaves a sour taste

Loyalty bonus schemes overseas have been successful at encouraging investors to retain shares long-term, says Brian Gaynor. Photo / NZH

The floats of Contact Energy, Vector and Auckland International Airport proved extremely popular with the group that the Government is targeting for the part-sale of Mighty River and other state-owned power companies.

Mum-and-dad investors were attracted by the steady incomes and long-term returns that are, typically, part and parcel of such utilities. As it was then, so it will be now.

Why, then, is the Government bothering to add a sweetener to the sales in the form of a loyalty bonus scheme? Sadly, it is a case of political timidity trumping market nous.

Having set out its stall during last year's election campaign and received a public mandate, the Government has every reason to be assertive.

But the ongoing noise created by opponents, notably about the possibility of many of the shares ending up in overseas hands, has created jitters. Thus, it has opted for a certain course even though it knows a loyalty bonus for those New Zealand residents who keep their shares for three years will distort the market. Denying that bonus to institutional investors will do the same.

The Government should recognise that the best policy would be to shelve this proposal and rely on the attractiveness of the shares to entice mums and dads to spend, say, $1000 or $2000 on them.

The loyalty bonus scheme will distort the market in several ways.

First, the shares will trade below their true value for the first three years. This discounted price will reflect the pending arrival of the bonus shares, which will be held back from the initial float, and the anticipated selling of many of these in three years.

Secondly, it is likely that most of those who miss out on the initial offering will stay out of the market until greater certainty prevails in 2015.

Thirdly, the failure to offer the same terms to institutional investors will do nothing to impress them or invigorate the share price.

The loyalty bonus also comprises shares that could, in the first instance, have enhanced the amount raised from the offerings.

The Treasury estimates the sum that will be forgone could be as much as $500 million. Even the Prime Minister's $60 million to $80 million is a substantial amount.

Despite these drawbacks, the Government obviously sees the scheme as a safeguard against investors selling their shares for a quick profit. But that concern rests more on a worst political case than market reality.

The "stagging" of shares is the territory of sophisticated investors, not the mums and dads who will be buying shares in the power companies. Overwhelmingly, they will be cautious by nature and eyeing long-term benefits. Often, the shares will be viewed as assets that they would like to bequeath to their children and grandchildren. If the offering is priced correctly, there is little danger of the shares being sold quickly.

In any event, the bonus scheme will cease to exercise any hold after three years. It will have no long-term effect on share trading. As such, it can reasonably be viewed as a device designed purely to allay concerns about the fate of the shares over the short term. Past that point, the initial goal of 85 to 90 per cent New Zealand ownership will answer to a different set of canons.

The Government expects up to 200,000 people to buy parcels of shares in Mighty River. It will not be disappointed.

The shortage of such stocks on the local sharemarket means the demand will be every bit as great as for previous utilities.

The float of Contact succeeded without the need for artificial incentives. So would Mighty River. The Government can afford to be bold.