English blames Labour-Greens, smelter controversy as Meridian IPO price set low

Meridian shares have been priced at $1.50 - at the bottom of the government's September 20 indicative range of $1.50 to $1.80 - and Finance Minister Bill English is blaming the Labour-Greens power policy and controversy over the Tiwai Pt smelter bailout.

The IPO price means the Crown will raise $1.88 billion from the partial float - $1.26 billion from next week's listing, and $628 million in 18 months when investors pay their final instalment.

The $1.50 offer price will give Meridian a market cap of $3.84 billion - a nose ahead of Xero's $3.78 billion (Meridian made a net profit of $295 million last year on revenue of $2.71 billion; Xero made a loss on revenue of $39 million in its 2013 financial year).

Fewer investors
62,000 bought into the Meridian IPO, down from the 116,000 who bought shares in Might River Power, which listed in May at $2.50 a share, but has traded down to $2.20 since.

Trading will begin on October 20.

Scared off
"Bear in mind the circumstances," said Finance Minister Bill English at a mid-evening press conference at the Beehive.

"We have the impression a lot of Mum and Dads were scared off by the Labour-Greens policy" as well as uncertainty over the Tiwai Point aluminium smelter and a realisation electricity demand has been falling and the companies are no longer "cash cows".

Labour and ther Greens have promised to introduced a single, nationalised electricity buyer if they gain power in 2014.

Revised contracts for the smelter's consumption were concluded in August for a plant that uses around 14 percent of all electricity produced in New Zealand and accounts for around half Meridian's annual revenue.

"Failure"
The $3.84 billion market cap compares to  $6 billion when it was last independently valued for the Treasury in 2011. While a large part of the difference is explained by the fact that control remains with the government as 51 percent shareholder and the previous valuation included higher power prices for supply to the Tiwai Point aluminium smelter, it also reflects the lacklustre retail appetite for the shares.

Labour Party state-owned enterprises spokesman Clayton Cosgrove labelled the float a failure.

"John Key and Bill English's asset sales are officially a farce as Meridian was sold off for $1.2 billion less than they promised and attracted just 62,000 investors," he said.

Many factors
Numerous factors combined to force down the price of Meridian shares. Chief among these were market fears that a Labour-Greens government, if elected next year, will gut electricity company profits to deliver large price cuts; and ongoing uncertainty about the long term future of the Tiwai Point aluminium smelter.

On top of that, the fact the MRP share price has fallen from $2.50 at issue in May to $2.20 today prompted major efforts to make the Meridian float as attractive as possible to small-time retail investors, whose appetite for the shares is important to the political success of the privatisation programme.

To that end, the government guaranteed no retail investor would pay more than $1.60 a share, no matter what price was set for institutional investors, and created a two-instalment payment programme, meaning investors will pay $1 now and the remaining 50 cents in May 2015.

Livelier in 18 months
Trading from October 29 will therefore not be in Meridian shares, but in Meridian instalment receipts, until the shares are fully paid in another 18 months time. This is expected to help stimulate a livelier after-market for Meridian shares than has emerged for MRP.

The government may still press ahead with the sale of Genesis Energy in the first half of next year, assuming market conditions suggest there is appetite for another large, New Zealand electricity company float.

With Contact, Meridian, MRP, TrustPower and network company Vector, half the shares in the top 10 NZX shares are in the electricity sector.

With MRP and Meridian proceeds totalling $3.58 billion, the asset sales policy is likely to struggle to reach the bottom end of the government's $5 billion to $7 billion range, although it has signalled Air New Zealand shares could be sold in a private placement to institutions at any time.

While Meridian will be 86.7 percent owned by New Zealanders, including the government, but it is clear it has attracted larger retail investors as there is scaling back required for some investors, who will be unable to buy as many shares as they applied for.

Investors who sought more than $20,000 of shares will receive only 55 percent of what they sought.

Of the 49 percent of the company sold, some 27.6 percent comes from foreign institutional investors and 12.7 percent is from New Zealand institutions.

With reporting by BusinessDesk

RAW DATA: Statement by Finance Minister Bill English & SOE Minister Tony Ryall

Meridian shares have been priced at $1.50, raising an immediate $1.256 billion from the first instalment payment with an additional $628 million to come from the second instalment in 18 months, Finance Minister Bill English and State Owned Enterprises Minister Tony Ryall say.

“Meridian will be 86.5 per cent owned by New Zealanders when the company lists on the NZX Main Board next Tuesday, counting the Government’s remaining 51 per cent shareholding.  This meets the 85 to 90 per cent New Zealand ownership target set by ministers.”

Based on the full $1.50 share price, the Meridian offer is the largest investment in an initial public offering by retail investors in New Zealand.

“The $1.88 billion that will be raised by the Meridian share offer is a real boost for New Zealand’s capital markets and our economy,” Mr English says.

With more than 62,000 shareholders, Meridian will have the third largest share registry on the NZX, behind Mighty River Power and Contact Energy.

“Meridian has attracted a different mix of investors than we saw with Mighty River Power earlier this year,” Mr English says. “While demand was strong and broad based, overall we saw fewer retail investors bidding for larger parcels of shares.”

Mr Ryall says the $1.88 billion raised from Meridian’s two instalment payments will be allocated to the Future Investment Fund and will be used to invest in the Government’s infrastructure programme.

“Combined with the $1.7 billion in proceeds from the Mighty River Power offer, this will be $3.58 billion over two floats which the Government does not have to borrow to reinvest in new, priority public assets.

“The Future Investment Fund is building new infrastructure around the country and that means jobs for New Zealanders. The Government is delivering on its plan to control debt and successfully set a path back to surplus.

“Scaling of allocations was required across all investor groups, however, New Zealanders were at the front of the queue for shares.

“We have applied a progressive scaling approach to the general offer where larger applications are scaled more than smaller ones.

“Broker firm applications have been scaled on a pro rata basis, as outlined in the Offer Document.

“Overall, 95 percent of retail applications will receive at least 90 percent of the shares they applied for.

“Applications from New Zealand and offshore institutions have also been significantly scaled back. Confirmations of allocations will be sent to institutions over the coming 24 hours.

“Meridian will list on the NZX main board at 1pm next Tuesday with an indicative market capitalisation of $3.84 billion, making it one of New Zealand’s largest listed companies,” Mr Ryall says.