The Treasury has finally developed a fair and widely accepted process for the Genesis Energy IPO.
The IPO, the Crown’s 25th state owned enterprise sale worth $30 million or more, takes into account the interests of individual investors whereas most of the earlier sales favoured large corporate bidders, overseas institutions and, to a lesser extent, New Zealand institutions.
The structure illustrated that the asset sales programme could have been a major success instead of a huge wasted opportunity as far as domestic investors, New Zealand capital markets and taxpayers are concerned.
The Government would probably have achieved much higher sale prices, and wide-scale public support, if the Treasury had applied the Genesis Energy approach to earlier privatisations.
The Government’s asset sale programme, which started 27 years ago, has involved two main processes – trade sales and sharemarket floats.
In a trade sale the entire organisation is sold to a strategic investor through an auction process.
A sharemarket float is where 10 per cent to 100 per cent of the shares are sold to individual and institutional investors and the company lists on a stock exchange.
A number of countries, including the UK and Australia, have had a strong bias towards sharemarket floats because they encouraged widespread ownership of large iconic companies. Governments can also sell shares in batches and realise a higher price per share for each successive sell down.
British Petroleum, Cable and Wireless, British Telecom, British Gas and British Airways were sold by this process in the UK. Commonwealth Bank, Qantas and Telstra were also sold in stages across the Tasman.
The Crown’s first privatisation was the sale of 103 million Bank of New Zealand shares, representing 12.9 per cent of the company, at $1.75 each in February 1987. The $180 million capital raising was an NZX record.
BNZ’s share price fell before the October 1987 crash as investors realised it had a huge exposure to the highly leveraged listed property and investment companies. Its share price finished 1987 at $1.30, 26 per cent below the issue price less than 12 months earlier.
The trade sale programme also had a discouraging start when New Zealand Steel was sold to Equiticorp for $327 million in March 1988.
NZ Steel was not in a strong financial position and Equiticorp was struggling to survive after the October ’87 crash and the Crown accepted payment in the form of Equiticorp shares. Equiticorp shares were worth $3.25 at the time but plunged to $1.
However, the sale contract required Equiticorp to arrange the buy-back of its shares at $3.25 on demand. Equiticorp chief executive Allan Hawkins was later jailed for illegal activities related to the repurchase of these Equiticorp shares from the Government.
The lesson from the BNZ and NZ Steel transactions was that the Crown should only consider an IPO when the SOE was in a sound financial position and it should only make a trade sale to business people with substantial financial resources and extensive industry experience.
The preferred strategy was to have a partial sharemarket float and then sell down further shares as the performance of these companies improved and their value increased.
Nevertheless a significant stake in the BNZ was sold to Fay Richwhite, which had limited financial resources and no experience of running a large retail bank. Subsequently the bank had to be bailed out by the Government and was sold to National Australia Bank at an extremely low price.
The National Provident Fund, which had no experience in development lending, purchased DFC (Development Finance Corporation) which quickly went bust.
Brierley Investments, another company with limited industry experience, led the consortium that purchased Air New Zealand and a Fay Richwhite consortium acquired New Zealand Rail, later called Tranz Rail.
Air New Zealand and Tranz Rail both experienced serious financial difficulties and had to be bailed out by the Crown.
The Crown’s first successful IPO was in 1998 when it sold its 51.6 per cent stake in Auckland International Airport.
However, this share float was not without controversy as 40 per cent of the shares were allocated to foreign institutions, 27.9 per cent to domestic broking firms, 17.2 per cent to New Zealand institutions and only 14.9 per cent through a public pool.
Foreign institutions received their shares on a deferred payment basis and many of them sold their shareholdings at a profit before they paid for them. This reignited the complaint that the Treasury seemed to favour big corporate bidders and foreign institutions at the expense of New Zealand individual and institutional investors.
The Crown sold 40 per cent of Contact Energy in 1999 to US-based Edison Mission for $5 a share. The remaining 60 per cent was sold to the public through an IPO at $3.10 a share.
The positive feature of this sale was that domestic investors paid a comparatively low price and the new cornerstone shareholder had extensive industry experience.
The negative was that Edison Mission was not in a strong financial position and the sale of its shareholding to Origin Energy caused considerable friction because the new controlling Australian shareholder was perceived to adopt an unsympathetic approach towards New Zealand shareholders.
Happily this tension has dissipated in recent years.
The partial privatisation of Mighty River Power, Meridian Energy and Genesis Energy represented a fantastic opportunity for Treasury to draw on the asset sale experiences it had acquired since 1987.
Investor interest would grow throughout the process if the sales were well executed and this would result in the Crown receiving a higher and higher price for each sale.
Although these were three different electricity companies the model to emulate was Commonwealth Bank where the first 30 per cent was sold at $5.40 a share and the next 19 per cent went to retail investors at $9.35 a share and to institutions at $9.60 a share. The final 51 per cent realised $10.40 a share for the Australian Government.
Unfortunately the Mighty River Power process was flawed because there was no clear transparency over the price-setting process and retail investors had to pay for their shares before the IPO price was set.
Market participants subsequently learned that Treasury officials had visited a large number of offshore institutional investors to brief them on the sale but no meetings were held with New Zealand investors.
This reconfirmed the widely held view that New Zealand’s privatisation programme has had a bias towards offshore investors.
The Meridian Energy float was through an instalment receipt basis because demand was muted following the sharp decline in Mighty River Power’s share price.
The main attraction of the Genesis Energy IPO is that the final price will be set before retail investors have to commit their funds and there is a more attractive loyalty bonus scheme for small investors.
The implied gross dividend for Genesis Energy is between 13.5 per cent and 16.5 per cent compared with 13.4 per cent for Meridian’s instalment receipts at the $1 issue price and just 7.2 per cent for Mighty River Power at the $2.50 IPO price.
This clearly indicates that the Crown has had to continue to lower its offer price throughout the latest sales process in order to entice investors.
However, this should not be taken as an endorsement of the Genesis Energy IPO as, based on past experiences, there is the possibility that Treasury, industry regulators or politicians could make decisions that will have a negative impact on the electricity generator’s share price after it lists.
|NZ Privatisations – A wasted opportunity|
|Sharemarket Floats||Trade Sales|
|Bank of New Zealand||13%||New Zealand Steel||Equiticorp|
|Petrocorp||30%||DFC||Nat. Provident Fund consortium|
|Auckland Airport||100%||Post Office Bank||ANZ Bank|
|Capital Properties||100%||Shipping Corp||ACT (NZ)|
|Contact Energy||100%||Air New Zealand||Brierley Investments consortium|
|Mighty River Power||49%||Rural Bank||National Bank|
|Meridian Energy||49%||Govt. Printing Office||Graeme Hart|
|Genesis Energy||30%-49%||State Insurance Office||Norwich Union|
|Tourism Hotel Corp||Southern Pacific Hotel Corp|
|Telecom||Ameritech & Bell Atlantic|
|NZ Timberland||ITT Rayonier|
|New Zealand Rail||Fay, Richwhite consortium|
|Govt. Computing Services||EDS Holdings|
|Wellington Airport||Infratil consortium|
|Radio NZ (commercial)||NZ Radio Network|
|Forestry Corporation||Fletcher Forests, BIL & Citifor|
|Works & Development||Downer & Kinta Kellas|
|SOE sales worth $30 million or more.|
Disclosure of interest: Milford Funds Ltd invests in shares in Auckland International Airport, Air New Zealand, Meridian Energy, Mighty River Power, Contact Energy and Telecom, on behalf of clients.