Government calls investors from the Meridian maimai

The government’s pitch for Mighty River Power was an aggressive assault on first-time or part-time investors, with flashy TV ads showing aerial shots of hydro-electric dams in all their glory.

It appears this time will be more like the opening day of duck shooting season.

The government’s in its maimai throwing decoys onto the investment pond hoping to reassure investors –who are wary after receiving a tail full of buckshot from Mighty River Power.

This week, Finance Minister Bill English and State Owned Enterprises Minister Tony Ryall confirmed what we already knew – Meridian is going to be a tough sell.

As flagged by the National Business Review print edition in July, the government has opted for instalment receipts to encourage investors to buy-in to Meridian. This allows them to delay paying 40% of the offer price for 18 months – but gives them access to three dividends over that time and voting rights straight away, as well as the ability to sell.

A share price cap will also be set for New Zealand retail investors – so people will know the maximum price they’ll be paying at the time they buy their shares.

Those promoting the offer will be pleased with the enticements, while others will be shaking their heads that such artificial constructs are deemed necessary to sell shares in one of New Zealand’s largest companies.

Price sensitive
For Meridian, much depends on the offer price set by the government.

As outlined by Messrs English and Ryall, at the conclusion of the Meridian share offer investors will be issued a tradable instalment receipt for every share they partially pay for. Once the final instalment is paid, the receipt is cancelled and investors receive ordinary shares.

A broking firm source says companies of the size and cashflows of a Meridian, or Australia’s Telstra, for that matter, are not supposed to be highly volatile companies.

“I would say that if the Meridian transaction is priced appropriately at the outset you shouldn’t expect massive amounts of downside risk on a Meridian – neither would you expect massive amounts of upside profit, it’s not that sort of company. It lends itself to this sort of thing.”

However, financial commentator Michael Coote, a NBR columnist, thinks the instalment receipts will be popular with speculators and their price will be volatile.

“Paying out the full dividend in three instalments on the instalment receipts, as if they were a fully-paid share, you would think that would be a downside protection, because you’re putting up 60% now to get the 100% of revenue from the security. That’s in its favour.

“On the other side of it though, I would expect a lot of volatility especially as you’re coming down to the last six months or so to the maturity date – because hanging over those receipts is the requirement to pay another 40%.

“You could find those receipts drop quite significantly in value if it looks like Meridian’s share price at the day the receipts mature, the actual share price is below that or the company’s performance is below that.”

Volatile history
Instalment receipts themselves have an interesting history – not all of it positive.

The government pointed out it used instalment receipts when it sold Capital Properties to the public in 1998.

Perhaps it wasn’t the best example.

In 2000, Milford Asset Management’s Brian Gaynor said Capital Properties’ acquisition of Shortland Properties and the company’s confusing and inadequate communication with shareholders had a big influence on a share-price slump – but so did the payment of the offer’s second instalment.

The company was taken over by AMP in 2005.

Cheerleaders of instalment receipts point to the success of ASX-listed Telstra’s third tranche of shares, known as T3, which was billed as a win for everyone – the government, the shareholders and the company.

But that’s to forget the painful lesson of T2, the second tranche of Telstra shares hived off by the Australian government. When investors paid their second instalment the shares were worth less than they paid for them.

And then there was the disastrous Airport Link motorway project in Brisbane – although that is slightly different because the instalments were structured to provide regular capital injections to a public-private partnership.

Tough sell
The difficulties in getting Meridian away are many.

Mighty River Power (NZX: MRP) is 13% off its offer price after what many market sources believe was inflated price-setting by Treasury, possibly after conflicting advice.

The country’s single biggest user of electricity, the Tiwai Point aluminium smelter, is only safe until 2017 and a new deal with the smelter’s majority owner, Rio Tinto, wiped nearly $500 million from Meridian’s assets.

Then there’s the Greens-Labour power policy, NZ Power, to create a single buyer of wholesale market electricity in an attempt to lower residential power prices.

Another factor is what’s happening in the market. The NZX50 is up 11.3% this year but down 3.2% since mid-May.

As previously mentioned, Mighty River Power is down 13% on its $2.50 offer price since trading began in May.

Over that time, Contact Energy shares (NZX: CEN) have dropped 4.5% (but up 11.2% over the last 12 months) and TrustPower (NZX: TPW) is off 5.8% (down 10.3% over 12 months).

Favouring government
Mr Coote thinks the government would have been better to issue Meridian shares in two tranches, with 100% paid up-front, with warrants for extra shares.

“It sounds to me like this one’s been written very much on terms favourable to the government.”

Most ordinary investors will not fully understand what they’re buying, he says.

Funds managers and Kiwisaver schemes with analysts on the team will get their head around the IPO's structure, he says, but if Mighty River Power’s lack of available brokerage advice is anything to go by, individual investors might be left flying blind.

The joint lead managers are Craigs Investment Partners/Deutsche Bank, Goldman Sachs/JB Were and Macquarie, and ASB, ANZ and Forsyth Barr have been appointed to the retail syndicate, which leaves only a few research houses for individuals to call on.

(It will be interesting to see if Morningstar follows its previous line with Fonterra and Z Energy, that people should hold off buying until after the float.)

Mr Coote says “wait and see” was probably good advice with Mighty River Power, rather than jumping in at the launch. The same might apply for Meridian.

“A person who is not able to grasp how this structure works, or how the price behaviour is likely to be influenced by the need to pay a future instalment, is probably better off to go for a plain vanilla company with a good track record and a known dividend history.”

dwilliams@nbr.co.nz