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Government IPOs an epic failure - Gaynor

Influential fund manager Brian Gaynor has lashed out at the government’s partial asset sale process, labeling the share offer programme a “wasted opportunity”.

Retail demand for shares in Meridian Energy was disappointing, with only 62,000 investors signing up to the IPO, about half the 113,000 who applied for Mighty River Power shares.

The majority of investors were allocated shares through brokers and could be considered more sophisticated, and perhaps high-net-worth investors rather than the more novice investors the government said it was trying to entice.

Mr Gaynor, who runs the high performing Milford funds, says the government shot itself in the foot by pricing Mighty River too high.

The subsequent fall in share price from the $2.50 starting point to $2.20 on the back of the Labour-Greens electricity policy has scared away retail investors from Meridian, arguably the best company in the mix.

And Mr Gaynor considers the final pricing of Meridian shares is also too high.

“It certainly was way on the high side as far as we were concerned … I don’t think it’s cheap at $1.50."

That price was set following an institutional bookbuild earlier this week, although the government had the final say. It came in at the bottom end of the $1.50-1.80 indicative range.

The retail price had been capped at $1.60 and local investors will pay $1 upfront and a second 50c instalment in 18 month's time.

Too many secrets
Mr Gaynor criticised the price setting process for a lack of transparency.

He questions why institutions weren’t informed that only 62,000 retail investors took up shares even though the Treasury would have known that last Friday.

“So there is a real lack of transparency – everyone likes keeping things secret here and not disclosing them. [Read NBR's earlier article on book-builds here]

“That [retail order book] was a strong market signal because it gave an indication as to the level of demand from retail investors. I would prefer that info be made available when it was known rather than after the process shut.”

Asked whether Milford took up many shares and what level of scaling institutions received, Mr Gaynor said: “We thought the price was on the high side, so you can draw your own conclusion from that.”

Finance Minister Bill English acknowledged that Meridian attracted a different mix of investors from Mighty River Power earlier this year.

“While demand was strong and broad based, overall we saw fewer retail investors bidding for larger parcels of shares.”

Disappointing outcome
However, Mr Gaynor says the outcome was most unsatisfactory.

“If you are selling a product and the first one you sell [Contact Energy in 1999] you get 225,000 people wanting to get shares, the second one [Mighty River Power] you get 113,000 and the last one – which is the best of them all [Meridian] – and you get 62,000, what does that tell you?

“It tells you quite clearly that you are not doing something right. It should be the other way round starting with Contact at 225,000 and finishing with Meridian at more than 300,000.”

Mr Gaynor says privatisation has been one of the most disappointing things this country has done over the past 30 years.

“If you look at all the companies that have been floated on the back of it – BNZ, Air New Zealand, TranzRails – one after the next, I can't think of any where I could say to you we have done it in a sense that we should be proud of, that it was transparent, it was fair and everyone was satisfied with the process.”

What about the Labour-Greens electricity policy to radically reform the electricity sector and crimp company earnings by up to $700 million a year? Didn’t that put a spanner in the works of the MOM programme?

Not done well
Mr Gaynor says, yes the NZ Power proposal has had an influence on investor participation in Meridian.

“But the main factor was the MRP share price. That wasn’t done right. There are very few people saying that issue was done well.

“The Labour-Greens policy was announced before hand so we knew what it was but yet it was done at a price that was too high and the bookbuild was unsatisfactory.

“Today even, there are not many people saying ‘shit, they did this one right, I’m glad they did Meridian the way they did’.”

Meridian is due to list on the NZX main board on a provisional basis on October 29.

Mr Gaynor says he doesn’t expect there will be many retail investors buying in the after market as their demand has been fully filled.

“Will there be a lot of institutional buying domestic or offshore? I can’t answer that. Although I do think most people did get reasonably what they wanted.”

Taxpayers lose
Grant Williamson, a director at independent sharebroker Hamilton Hindin Greene, says the government will be disappointed at the final price for Meridian.

He says the NZ Power proposal played a big part in retail investors not turning up: “The largest overriding factor in all of this is the Labour-Greens and their policy on what they would to the electricity market.

“That has certainly turned a number of smaller investors off because of that uncertainty and the last thing investors want is uncertainty.

“The government may be touch disappointed at the final price and, dare I say it, we can blame the Labour-Greens policy for the disappointing share price, which has reduced the overall funds the government and the people of New Zealand are going to receive,” Mr Williamson says.

More by Duncan Bridgeman

Comments and questions

I put my order for Meridian through my broker, so by definition was happy to pay $1.60 a share. In the end I got scaled back 10% so the Government could sell the shares I wanted to Mr Gaynor et al for $1.50. My colleague applied direct for shares and was scaled back 30% to fill the institutional market at the cheaper price.I agree with Mr Gaynor , the process has not been handled well. I believe the Government have been poorly advised in regard to both recent sell downs.

Exactly poorly advised

The only winners have been the greedy brokers - nothing has changed with their behaviour over the years. If I was Bill English or a member of his office I would be seriously questioning his Govt department advisors performance.

The brokers should be getting their fees discounted for poor performance - rather then the Govt or taxpayer taking the hit.

You don't get it - the brokerage system targeting the general public or 'chumps" as the brokers would say, is getting a free pass - courtesy of Key and the tax paying slaves.

Johnny doesn't give a rats arse if it's a failure because only the chumps lose, not him or the brokers!

What we need is a transparent book build process such as that which has just been introduced by the ASX.

Changing bookbuilds would be one of many many changes to an abortionate process. Bookbuilds have for years been massaged by brokers to look after their larger and overseas clients against the interests of the smaller investors. Even caps only go so far in the process of encouraging or levelling the playing field for private investors.

Start by making it easy to open an account at a Stockbroker. That encourages use of financial advice. Many MRP shareholders who were new to the industry found they couldnt sell when they wanted to as the AML legislation introduced forced hours and hours of paperwork to open an account with a Stockbroker. Introducing the AML legislation at the same time as the Government IPO's was a bad error of judgement - I think by former minister (now head of Westpac private wealth) Simon Power.

Secondly - there is too much concentration of influence by a small group of brokers on market activity and support for issues. There needs to be 20 - 25 brokers in NZ none having more than 10% of the market, to ensure a properly performing market. At the moment 2 retail brokers have between them around 40% of the AFA's employed by NZX firms and both are more focussed on their Funds under management models - which is a low risk approach to managing money and which disenfranchises the clients from their investments, and generally provides lower risk and inevitably lower returns.

Secondly - the IPO advisory group includes a whole lot of "has beens" (some were succcessful stockbrokers of 10 - 15 years ago), but almost all of whom dont realise the world has changed or believe that the changes in AML, move to platforms and introductory brokers etc are all going to encourage participation in the market - which they dont. These changes have gutted the markets and the performance. Xero, A2, Pacific BioTech and many of the other stocks that have performed have done so for the ordinary DIY investors, and havent been supported by the mainstream platform funds under Management models that the major brokers have followed, which whiel good for their business models (certain anuity income) isnt in the bext interests of their clients.

Many people have offered the Government and Treasury advice. It has largely been ignored because of pre-concerived ideas and a lack of consultation on the process. Treasury has hidden behind large names (Macquarie and Goldman and this is to their detriment). The industry have had their advice ignored. the pre-registeration process was a joke in both rounds, not user friendly and left many with more questions than answers.

Thirdly - a online transparent bookbuild system is required, one which allows all participants, (NZX stockbrokers, non NZX stockbrokers (which is approximately 60% of the market for AFA's, institutions and the public) to see what is happening and to make their own calls on participating. At $1.50 I believe a number of additional investors would have participated.

Fourthly - Many investors have been totally turned off the 224 pages in a prospectus and after years of being told to make sure they understand what they are investing in they look at the documentation and cant be bothered reading these documents. The size of the documents largely reflects the response to the FMA (and its predessor) bureucrats holding directors to account for "failure to disclose every possible risk". Excpet ina few circumstances people are shying away from the risk of being directors and so when they do take on one they want every risk covered, tested, verified, and legal views on the issue. This has been a huge win for the legal fraternity who now charge millions for the hours spent compiling prospectuses to reduce the risk for the Directors of the FMA and others having a crack at them. Without doubt the FMA and the regulation of the financial services industry has caused willingness to participate in risk assets to wane as they promote a risk is bad mentality. Risk is the only way to get decent returns / rewards.

The timing was wrong, and if the government is stupid enough to do anymore sales before May next year, they will really suffer, as it takes time for investors to accumulate spare cash, and to follow a process, and to get over Christmas bills, tax obligations etc. April ? May should be the earliest and ideally June. The next one should be the stake in Air NZ, and not Genesis.

Scuttlebutt I hear is that even the brokers didn't make much if anything on either MRP or Meridian after expenses.

It is interesting a fund manager who gets all the research and the one on one presentations wants to know all the details of the retail book before he commits! It seems to me fund managers have a few advantages over retail in this process.
Having said that, the initial MRP pricing was clearly poor, and I think the government was maybe more to blame for this than the advisors.
This sector could well look cheap if Labour/Greens stumble and they may well dilute the current policy if they do get up.

the investor numbers are down, however average holdings up.
MRP has a large share register of owners that will hold the minimum number of shares, this will cost the company in compliance and at some stage the company may buy these people out as the costs increase.'( they may also have an uphill road to keep these people informed about their shares and help them understand what share ownership is also about)
what has not been discussed is the Gross amount that retail customers have applied for compared to MRP.
as for the share price book build, buyers of larger chunks such as fund managers usually buy shares for less than the retail clients , so not sure what the issue is here.
Finally, as a mum and dad investor, would you wade through the 600+ pages of the investment disclosures(including the large amount of pages that talk about the risks ) then decide to invest?
its not an easy road whether you measure it by time or simplicity.
On the question of was either float successful? Ask me in ten or twenty years.

What we should be looking at is the way that Labour - Greens hijacked the process and they have effectively cost the tax payer millions. Surely getting the books balanced and the economy running well should be a priority rather than people continuing to live beyond thier means.
The media seems content to just blame the Government and leave the other side alone.

Richard, you can hardly expect the NZ MSM to support responsibility; nor condemn irresponsibility and sedition.
It is not part of their psych, nor does it sell newspapers or increase TV ratings.

As a retail investor, I was very disappointed about the scaling that has been applied. There has been precious little in the media about this aspect. The scaling has been much more extreme than MRP. Bollocks to Ryall and English saying that Mum and Dad investors would be in front of the queue!!

Probably a touch harsh - but no doubt to help get some extra attention to himself and his fund...

I don't understand why the Goverment felt the need to push this particular sale through. Why not sell down Air NZ or some other asset first?
- It didn't achieve its financial objectives in terms of raising cash;
- It didn't add anything to the available options for investors, who can already access other electricity assets;
- It didn't encourage new investors to get involved (judging by the poor numbers);
- It didn't improve confidence in the asset sales process (judging by market comments including Mr Gaynor's).

So why did they do it again? Are they that sure they will lose the next election, and not have another shot in 2015?

Gaynor is wrong - the MRP float was a great success for the government as it sold shares at a 15% premium to the current market, so $200 million more in the kitty for future investment!

I disagree over time the value of the business will increase dramatically and any perceived shortfall will easily be regained and more importantly the bit I believe you have missed as an advisor is that the companies now have a board which means the shareholders and in particular the government at 51% will have their interest at heart.

The only epic failure I see is the failure to understand that you have confused politics with business. I enjoy your articles and read with interest.

Today you have lacked long term vision and for an advisor using the word epic means you have become emotional in your thinking.

Send the bill for the shortfall to Russell Norman, let him know what it feels like to be a "rich prick".

Though I am not a business person but a "mum & dad" investor, I cannot see any business logic in scaling down a mere 5k, not 50k, application, because there is no over-subsription that required scaling down. When you have 100 fruits to sell, 6 buyers come along, each wanting to buy 10, you refused, because that is too much. So, what is the actual gross amount retail investors got? has the government achieved the target ?? Good luck in your future sales. I will not be your buyer.

It was the Greens and Labour who have robbed the NZ public of achieving more for these assets. If it was private property they were meddling with and threatening there would have been an uproar even by the left. How can these parties have NZ's best interests at heart when they destroy value in front of us by their policy.
As for your comments Brian it sounds like you have got the hump because you may not have got as many Meridian shares as you would have liked!

Anything for the cause, Comrade. You have to destroy something first before you can rebuild it.

Nothing changes. This is an interesting commentary including the subsequent debate but all its doing is reinforcing my determination to never buy NZ shares again, a decision I made decades ago without regret.

The clear message to Key and English is that the public does not want these assets sold. Why won't they listen? Is it ignorance or arrogance?