On the back of the Mighty River Power (MRP) float last week the Government has confirmed that Meridian Energy will be next.  Meridian is the gem in the crown jewels as it is expected to have the highest valuation at over $5b compared to MRP’s $3.5b value at listing.  This blog will explore some of the differences between the two state owned electricity companies.

The two companies were formed in 1999 when the remaining ECNZ assets were split into Meridian Energy, Mighty River Power and Genesis Energy.  Both Meridian and MRP were given valuable hydro power assets with the former receiving Manapouri and the Waitaki System in the South Island and the later receiving the Waikato River system in the North Island.  Post 1999 Meridian has developed new wind assets while MRP instead developed geothermal assets and purchased a gas fired power station in Auckland.

Meridian is a more valuable company as it’s hydro assets typically generate far more electricity than MRP’s Waikato assets.  In the June 2012 year Meridian generated 9,790 GWh from hydro power stations while MRP generated 4,291 GWh.  Meridian typically produces closer to 12,500GWh from hydro but 2012 was low as its lakes received the lowest inflows on record going back to 1958.

If Meridian was to be floated on the same EV/EBITDA multiple as MRP, based on it’s more normalised 2011 earnings, it would be valued at $5.25b.  This would be an IPO worth $2.5b compared to the $1.7b MRP IPO.  With the Meridian offer being 50% larger than the MRP offer, the Government will have to attract 170,000 retail investors to avoid selling a greater portion to domestic institutions and offshore investors. 

At time of writing MRP is trading at $2.57 giving a 3% return to investors who took up the offer.  While a healthy return, at this point it is probably not large enough to entice 170,000+ investors to the Meridian share offer.  To make the Meridian offer more attractive the Government could consider a discount to retail investors or offer a more attractive bonus scheme than the 1 for 25 offered for the MRP float.  Other options include making the pricing of the IPO more attractive or selling Meridian in two tranches three to six months apart.

While no date is set, it is likely Meridian comes to the market sometime around October this year.  The performance of MRP over the next few months is likely to determine how the Meridian offer will be structured.

12 months to 31 December 2012

  Meridian MRP
Revenue ($m) 2,508 1,900
EBITDA ($m) 459 467
     
Generation   (GWh) 11,029 7,104
Hydro 88% 61%
Geothermal 0% 31%
Wind 12% 0%
Total Renewable 100% 92%
     
Gas 0% 8%
Coal 0% 0%

William Curtayne

Senior Analyst