Two events this week, the Mighty River Power annual meeting and the Commerce Commission’s decision on Chorus, clearly illustrate that serious questions need to be asked about the Crown’s transparency and decision-making processes.
The Government has several similarities to a luxury cruise liner that has no captain.
The Crown has the equivalent of a navigator, a chief engineer, a purser and a passenger services manager but no one on deck to make sure the vessel is sailing a consistent course.
Mighty River Power (MRP) is a case in point as its share price has fallen from the IPO figure of $2.50 to $2.20 – albeit the company paid a 7.2c dividend in September – while the benchmark NZX 50 Gross Index appreciated nearly 6 per cent over the same period.
Chairwoman Joan Withers told shareholders: “In the period since our listing, the company has delivered: we have … outperformed our IPO financial forecasts.”
She went on to say “many analysts and commentators have opined on the final price set at the time of our listing. It is important to remember that this was an offering by the Crown as the sole shareholders – the pricing decision was made solely by the Crown and shareholding ministers – and with all of the proceeds from the IPO going to the Crown”.
Her clear message was that the company was not responsible for the disappointing share price performance; the Crown is culpable because it set the IPO price too high.
The problem with the MRP float is the inherent conflict with the two shareholding ministers, Finance Minister Bill English and State-Owned Enterprises Minister Tony Ryall, on one side and the seven MRP directors on the other. All nine signed the prospectus.
It appears the Treasury, which is more like a chief purser than a captain, made most of the important MRP decisions, particularly the IPO price. But it is not usually a big-picture entity, it is in charge of the Crown’s purse strings with a perceived mandate to maximise the sale price.
The IPO price was very short-sighted because MRP’s poor share price performance meant that 49 per cent of Meridian Energy was sold well below the expected price.
The Crown wouldn’t win any award for transparency as far as its relations with big business are concerned.
It appears that the Treasury allocated 347 million Meridian Energy shares to overseas institutions but gave only 160 million to New Zealand institutions, including KiwiSaver funds. If this is correct, why was there such a strong bias towards overseas investors?
What were the criteria for giving SkyCity additional gambling facilities if it builds a convention centre in Auckland? Why are the owners of the Tiwai Pt aluminium smelter receiving a special payment?
Why were investors in South Canterbury Finance bailed out when investors in other finance companies suffered substantial losses?
The Crown is not great on transparency but it insists on being fully informed itself.
Withers told the MRP annual meeting that monthly accounts are given to the Treasury to be included in the Crown’s monthly financial statements. This is consistent with the prospectus statement and Public Finance Act which means that Air New Zealand also provides internal monthly accounts to the Crown.
But one of the most important principles of the NZX, and most reputable sharemarkets, is that all shareholders be treated equally when they are buying or selling shares.
Several inquiries, including a Securities Commission report into the NZX-listed Bing Harris 30 years ago, looked at this issue. The Bing Harris report concluded “any disclosure of corporate information that is not available to members generally, and in the case of a listed company, to the public, should not be made except with the express consent of the board of that company”.
It went on to note that it is improper for a shareholder “to buy or sell such securities while the market does not have access to that information”.
The Crown breaches this important principle when it decides whether to participate in an MRP or Air New Zealand share buyback.
The Key Administration is expected to sell a large stake in Air New Zealand in the next month or so – without a prospectus – yet it will have far more detailed information than the buyers.
If we want to develop truly credible capital markets then all shareholders, including the Crown, should be on the same footing when they are buying or selling securities.
The MRP meeting concluded with a shareholder’s request for a comment on the company’s share price. A loud “buy some more” comment was heard from the back of the meeting in response.
Withers said the company had experienced the perfect storm, namely Tiwai Pt, the Labour/Greens electricity sector proposal and rising long-term interest rates. However, she said the good news was that MRP had added 1000 new shareholders since listing and most of them seemed to be “in for the long haul”.
Chorus is looking more like a sister ship, with the Commerce Commission, Communications Minister Amy Adams and Prime Minister John Key’s ultra-fast broadband programme wrestling for control of the steering wheel.
The commission announced on Tuesday that the total price Chorus could charge telecommunication companies for access to its copper network was $34.44 per line per month compared with the current charge of $45.92.
The new charges are due to apply from December 1 next year.
Chorus’ response was that the new pricing would reduce annualised earnings before interest, tax, depreciation and amortisation (ebitda) by $142 million and seriously inhibit its ability to complete the Government’s ultra-fast broadband programme. The company’s share price plunged 6.8 per cent on Tuesday, 5.5 per cent the following day, 9.3 per cent on Thursday and 4.76 per cent yesterday.
On Thursday Communications Minister Adams announced that she had asked “the Ministry of Business, Innovation and Employment to work with Crown Fibre Holdings to commission independent advice on Chorus’ financial position and capabilities to deliver on its contractual obligations to the Government”.
This brings several additional parties into the Government’s decision-making process and raises the issue as to how ministers make their decisions.
The telecommunications sector was almost totally unregulated when owned by the Crown but is now highly regulated under private ownership, particularly as far as pricing is concerned.
The electricity industry, where the Crown still has a major role, is more lightly regulated with prices rising steadily in recent years.
Will the electricity sector be more highly regulated now that the Crown has sold down its interests in Meridian Energy and Mighty River Power?
Will government ministers give Chorus more favourable treatment because it plays a major role in John Key’s ultra-fast broadband programme?
The problem is that the Chorus debacle could overflow to Mighty River Power and Meridian Energy’s share prices as overseas investors begin to realise that there are huge regulatory and inconsistent government policy decision risks associated with New Zealand.
There has been a great deal of publicity over the potential risks to investors of the Labour/Greens electricity sector proposals.
Investors are now realising that there are huge risks associated with the current Administration because it doesn’t appear to have anyone at the helm steering a straight and consistent course as far as major business decisions are concerned.
Disclosure of Interest: Milford Funds Ltd holds shares in Chorus, Meridian Energy and Mighty River Power on behalf of clients.