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Government IPOs an epic failure - Gaynor

Duncan Bridgeman
Fri, 25 Oct 2013

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.

Duncan Bridgeman
Fri, 25 Oct 2013
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Government IPOs an epic failure - Gaynor