MOM vs SOE model

October 29th, 2013 at 4:00 pm by David Farrar

Stacey Kirk at Stuff reports:

If Solid Energy was partly privatised, it probably would not be in the mess it is in now, Prime Minister John Key says.

Continuing to defend the Government’s sell-down of state assets, Key said today a deal to bailout Solid Energy might not have been necessary had the company been partially floated.

“My own personal view is if we’d had the mixed ownership model applied to Solid Energy, it may well not have gotten itself in the mess it did,” he told Firstline.

“That’s because the external analysis would have rung a lot of bells and demanded a lot more accountability,” he said.

This is absolutely right.  Companies listed on the NZX have continuous disclosure obligations. They have a share price which indicates what the investment experts and shareholders think the company is worth. You get far far more accountability with an NZX listing than you do with an SOE.

He also said other state-owned assets such as TVNZ and NZ Post, had proven not to be good long-term investments to hold on to.

TVNZ and NZ Post will probably both be worth next to nothing in 10 years times. We should be selling them while we can get a cent for them.

“People look at it through rose-tinted glasses, but the reality is the SOE [State-Owned Enterprise] model is not actually a brilliant model,” he said.

“The mixed-ownership model is probably a better model,” he said.

I prefer a full private ownership model if the company is a commercial trading company, but MOM is certainly superior to SOE.

Tags: ,

The pitfalls of public ownership

October 4th, 2013 at 12:00 pm by David Farrar

The Herald editorial:

The Green Party has called the Government’s bail-out of Solid Energy “privatisation by stealth”. Would that it were so. The state coal company will cost the taxpayer $155 million under the terms of the bail-out. It would have been more if the banks holding most of the company’s $380 million debt had not agreed to exchange just $75 million of it for shares in the company.

The banks could have insisted on repayment of all the debt, liquidating Solid Energy and costing 1,000 jobs.

But State-owned Enterprise Minister Tony Ryall is saying little to suggest there is any prospect of Solid Energy going back on to the partial privatisation programme with the power generators and Air New Zealand. More is the pity. The rise and fall of Solid Energy is a textbook example of the pitfalls of public ownership.

There is a case for the Government to own some monopolies like Transpower. There is no case (in my mind) for the Government to own a coal company.

Labour’s state-owned enterprise spokesman, Clayton Cosgrove, never tires of the phrase “asleep at the wheel” when blaming ministers for the company’s ambitious investments. But Treasury records show that in 2010, when coal was still booming on China’s continuing steel production and the board of Solid Energy was making big plans to diversify, the Government was cautious.

Indeed. The Government turned down the funding for the big plans. I suspect Labour would have handed over a billion dollars and renamed Solid Energy KiwiCoal.

If world prices pick up and the company can entertain wider ambitions again, it should be sold to the biggest bid. There is no reason for coal to be a state concern and every good reason to relieve the taxpayer of further risk.


We should sell TVNZ also, while someone will still pay money for it.

Tags: , , ,

The Solid Energy package

October 2nd, 2013 at 10:00 am by David Farrar

Adam Bennett at NZ Herald reports:

The Government has loaned stricken state owned coal miner Solid Energy $100 million and extended a further $30 million standby facility as part of a restructuring package announced this morning.

Finance Minister Bill English and Minister for State Owned Enterprises Tony Ryall said the package had been agreed between the company, the Government and key lenders.

“As we have said previously, ministers were not prepared to expose taxpayers to on-going losses if Solid Energy’s core business was not considered viable,” English said.

“However, we also said that we were prepared to provide support for the company if there was a reasonable chance it could be made viable, and we expected the lenders to also contribute to that recovery,” he says.

This is a good outcome for the 1,000 or so staff of Solid Energy. However it is risking a further $100 million of taxpayer money. Hopefully the loan will be repaid in time, as Solid Energy adjusts to the new environment.

This for me reinforces why absolutely the Government should not own competitive commercial companies like Solid Energy. Taxpayers should not have to be exposed to the risks involved with such investments.

Chairman Mark Ford said the proposal “would allow the refocused coal mining business to trade its way back to profitability over the next few years, but that this would have to be supported by ongoing efficiencies and cash generation and improvements in the international coal market”.

“We believe that the company has a good operating future and we hope that with the continued support of our shareholder and our funders, we can re-establish the company as a major employer and economic contributor in our key coal mining regions.

The moment it is stable again, we should sell it – and not just 49% of it. If we had sold it three years ago, the taxpayer would be hundreds of millions of dollars better off.

Tags: ,

The $9 million waste of money dates

October 1st, 2013 at 10:00 am by David Farrar

3 news reports:

A citizens-initiated referendum into National’s asset sales will be held by postal vote in November.

Prime Minister John Key confirmed the referendum will cost about $9 million and is the cheapest option to hold the non-binding vote. Voting in person would cost taxpayers $39m.

That’s a relief!

Voting will be open from November 22 and close on December 13.

By which time there may only be one sale to go! Ridiculous. Phil Goff said the 2011 election will be a referendum on asset sales. He was right.

Tags: , ,

Meridian dates

September 16th, 2013 at 4:59 pm by David Farrar

TVNZ report:

Meridian will be listed on the New Zealand and Australian stock exchanges on October 29, with an offer document set to be lodged with the Financial Markets Authority this Friday.

The offer document will include the price range, the price of the first instalment, the capped price of the second instalment and the expected yield.

It is expected that people will be able to apply for shares from September 30, with the general offer expected to close on October 18.

This will be followed by a book-build process, where institutions will be able to bid for shares.

Excellent to see the Government making progress on implementing its election commitments. I look forward to investing in Meridian as I believe it to be a good solid long-term investment.

Tags: , ,

Greypower hypocrisy

September 16th, 2013 at 3:00 pm by David Farrar

TOTD 14092013


Keeping Stock blogged this exchange.

I’d love someone to ask Grey Power how they managed to get a discount from an evil privately owned electricity company, yet failed to get a discount from those nice benevolent state owned power companies!

Tags: , ,

Armstrong on asset sales referendum

September 7th, 2013 at 1:00 pm by David Farrar

John Armstrong writes in the NZ Herald:

The time has surely arrived to dump New Zealand’s failed two-decade-old experiment with American-style citizens-initiated referendums.

Anyone questioning that recommendation should look no further than some of the self-serving behaviour following last Monday’s official authorisation of such a plebiscite on National’s partial privatisation programme.

The will of the people – David Lange once observed – was a fickle beast. It could be an awful tyrant; it could be a terrible slave.

Someone should have told the Greens. They are happy to accept the will of the people when it comes to the results of the forthcoming referendum on asset sales. But not so when it came to the 2009 referendum on smacking. That is hypocrisy, pure and simple. If you accept the will of the people once, you have to accept it for good. And that is not a recipe for good government.

If you do accept it, you accept your Cabinet decisions are going to be proscribed by referendum. The Greens would not like that happening to them. So why impose such restraints on National.

Thank God someone is calling it for what it is – flagrant hypocrisy.

If there was a successful CIR on lowering income tax rates, would the Greens drop their opposition to lower taxes? Of course not.

When the law allowing voters recourse to these devices was passed by Parliament 20 years ago, Labour’s Michael Cullen described the measure as “an ill-thought-out piece of political flummery” and predicted correctly that it would end up satisfying no one. He was too kind. Making it mandatory for governments to implement the results of referendums risks making good government nigh on impossible.

Making such referendums non-binding on governments, however, renders those referendums as next to useless.

And making them binding can be a good way to bankrupt a state!

Tags: , , , ,

The Press on CIRs

September 5th, 2013 at 11:00 am by David Farrar

The Press editorial:

When the act allowing for citizens initiated referendums to be held was passed in 1993, it provided that they could only be started after a petition to Parliament signed by 10 per cent of registered electors within 12 months.

The provision was designed to be, and has been, an effective deterrent to single-issue cranks getting their pet obsession on to a ballot paper. It means that anything that does make it to a referendum has some public support already.

It has not, however, prevented the four referendums held so far from being a waste of time and money. All four have produced the answer their proponents wanted and all four have, quite properly, been ignored by the governments of the time, both Labour and National-led.

People should keep asking those who claim a CIR should trump an election, when they will vote to amend the anti-smacking law in line with the 87% vote in that referendum.

The referendum is even more pointless than usual. Not only will it have no influence on the Government’s stance on the issue, it is also on a matter on which the Government undoubtedly gained a mandate at the last election – the fate of state assets was one of the foremost issues of the election campaign. The partial sale of state assets is, furthermore, an issue for which the Government will be answerable at the general election just over a year from now.

That is how it should be. You put up a policy at an election. You keep your word and implement it. You get judged on your record at the next election.

Tags: , , , ,

Cheek indeed

September 5th, 2013 at 10:00 am by David Farrar

John Armstrong writes in NZ Herald:

The week’s prize for barefaced cheek must surely go to the Greens.

With Parliament’s Clerk of the House yesterday finally giving the okay for a non-binding referendum on National’s asset sales policy, the Greens listed the costs to the taxpayer so far of the Government’s partial privatisation programme.

Included in the total, which the Greens estimate as close to $125 million, was $9 million to pay for the referendum.

That sum is certainly a cost the Government has to meet. But it is a cost forced on the Government by virtue of the successful efforts of the Greens and the other Opposition parties.

They force the referendum, and blame the Govt for the cost. Incredible.

The logic for citing this as a Government-imposed cost on the taxpayer was that the referendum was only being held because National has an asset sales policy.

On that basis, the Greens should have included the nearly $50,000 in taxpayer-provided money drawn from its parliamentary funding to pay eight staff to collect signatures for the petition needed to force the referendum.

The $50,000 was only the cost of the extra staff. I estimate the total cost to the taxpayer was around $400,000 when you include all the full-time staff who worked on co-ordinating the petition.

Tags: , , ,

Asset Sales referendum is go

September 2nd, 2013 at 1:58 pm by David Farrar

The Herald reports:

A referendum will be held on asset sales after confirmation that a petition under the Citizens Initiated Referenda Act gained the support of 10 per cent of eligible electors.

The petition, organised by the Keep Our Assets coalition and led by Grey Power president Roy Reid, asked: “Do you support the Government selling up to 49 per cent of Meridian Energy, Mighty River Power, Genesis Power, Solid Energy and Air New Zealand?”

Shares in Mighty River Power were first floated on May 10 this year.

The Clerk of the House of Representatives, Mary Harris, today said she was satisfied the petition had more than the 308,753 signatories required on March 12, the day it was delivered.

The Clerk was originally expected to announce the results at 1pm.

But an embarrassing mistake by Greens co-leader Russel Norman has marred the release for Opposition parties.

Dr Norman tweeted the news this morning, having missed the embargo.

He then tweeted an apology.


The coalition had two months to collect 16,000 valid signatures after the initial count was deemed just short of the number required. After a thorough checking process, it was estimated that 327,224 eligible electors signed the petition, about 18,500 more than required.

This is the fifth petition under the Citizens Initiated Referenda Act to proceed to a referendum.

The Speaker is expected to present the petition to the House tomorrow.

The Government will then have a month to set a date for holding the referendum or specify that it is to be a postal referendum.

The date of the referendum must be within a year of its presentation to the House, unless the House by a 75 percent majority vote agrees to postpone it for up to a further year.

If I were the Government I’d do a postal referendum as soon as possible – say December.

Labour’s SOE’s spokesman Clayton Cosgrove said the asset sales programme must be halted until after the referendum.

“John Key must respect the democratic process. Over 327,000 Kiwis have called for a referendum. Their voice must be heard,” he said.

What nonsense and hypocrisy.

If Labour and Greens are now claiming a referendum trumps an election, then why did they vote against allowing parental correctional smacking when 87% voted it should not be a crime? They voted down a bill to allow it, just weeks after the referendum. National voted against also, but at least National has never claimed a non-binding referendum should trump an election policy.

The point of the referendum is to politically damage the Government. Now fair enough, but let’s not pretend it is anything else.

Of course taxpayers now pick up the cost of the referendum, on top of the hundreds of thousands of taxpayer dollars spent on collecting signatures.

The reality is that National got a mandate for its policy at the election. This was not some minor obscure policy. It was a policy debated for 10 months after it was announced in January 2011. It was at the centre of the election campaign. Labour’s entire campaign almost was focused on stopping the partial sales, and the result was they failed.

Tags: , ,

Herald on Meridian sale

August 21st, 2013 at 2:00 pm by David Farrar

The Herald editorial:

The structural drawbacks have largely been remedied for Meridian’s part-float, as needed to be the case given that it is easily the largest of the three power companies on the Government’s privatisation list. The sale will involve instalment receipts that allow investors to pay for the shares in two bites while receiving the full dividend. The first instalment will be for 60 per cent of the share price, payable on application, with the balance to be paid in 18 months. This greater affordability is enhanced further by a minimum application of $1000 for the first instalment. There will also be a share cap for New Zealand retail investors, so they will know the top price they will pay in both instalments.

This approach is not unique. It was used for the float of Australia’s Telstra and, locally, by Ameritech when it exited its Telecom shares. In both cases, it answered a particular need to create a heightened attraction to potential investors. It is understandable that it should also be used for Meridian.

David Shearer was comparing this on TV to doing layby at Harvey Norman. Not sure why Labour would want to use such a positive analogy!! Many Kiwis do shop at Harvey Norman and love using layby to make big purchases more manageable.

It is important that many choose to become Meridian shareholders. On the broadest of fronts, a shareholding democracy is about reducing this country’s unhealthy emphasis on housing investment. 

The companies benefit also from the discipline and transparency of a market listing.

Tags: , , ,

Why the assets sale petition failed

June 10th, 2013 at 9:00 am by David Farrar

The assets sale petition that failed (but can be re-submitted) had the highest number of non valid signatures of any CIR since the 1990s. I was interested in why this was the case so requested documents from the Office of the Clerk, Electoral Commission and Stats NZ under the OIA.

There were 393,778 signatures submitted.  They needed 308,753 to make 10%. Stats NZ found the estimated number of valid signatures was 292,291 with a standard error of 2,579.  That meant 26% of signatures were invalid.  Stats NZ commented:

The probability of there being enough valid signatures in the full petition given the results of our sample is (negligible) less than one in a billion.

So why were so few signatures valid. The sample stats were:

  • Signatures checked 28,127
  • Unique electors 23,031
  • Ineligible signatures 4,909 (not on electoral roll)
  • Illegible signers 21
  • Duplicate 166

Now that level of duplicates may not sound high, but that is the number of people found as duplicates just in the small sample tested. If you checked the entire sample, you would get far more. Stats NZ estimates that all up, 11% of those who signed the petition signed it at least twice. That is a very high proportion, and significantly higher than any other CIR where the figure has ranged from 5.1% to 8.8%.

The proportion of ineligibles was 17%, and the range in other CIRs has been between 12% and 18%. So the key difference with this CIR was not the proportion of ineligible signing it – but people fraudulently signing it more than once. 11% means one in nine signers signed it twice!

There is a case to be made that if you sign a petition twice, both signatures should be struck out – rather than just one of them. Just like with double voting.

Incidentally I didn’t sign the petition any times. To the best of my memory I’ve never signed any CIR petition except the one for a referendum on the flag.

Maybe when the Greens spent all that taxpayer money on hiring people to (get people to) sign the petition, they should have told them to tell people to sign it once only.

It will be interesting to see how many duplicates are there when they resubmit the petition in two months. If they target the same people and areas as the previous 12 months, then they may end up just getting more duplicates.

My thanks to the agency staff who compiled the info for my request.

6. Briefing Notes for GS 02.05.2013

Tags: , , ,

MRP shares

May 10th, 2013 at 12:49 pm by David Farrar

MRP shares are now at $2.73. Labour and Greens scared off some smaller investors but larger investors have worked out their nationalization policy will never be implemented, and are valuing shares higher.

Tags: ,

Share price set at $2.50

May 8th, 2013 at 8:47 pm by David Farrar

The Govt has announced:

113,000 New Zealanders will become shareholders in Mighty River Power following a successful share offer, Finance Minister Bill English and State Owned Enterprises Minister Tony Ryall say.

The final price will be $2.50 per share.

Of the shares issued, 86.5 per cent will be New Zealand owned: 26.9 per cent by New Zealand retail investors, 8.6 per cent by New Zealand institutions and with the Crown retaining a majority 51 per cent shareholding. That leaves 13.5 per cent for overseas institutions.

“This is an outstanding result and fulfils our commitment to ensuring at least 85-90 per cent New Zealand ownership of the company,” Mr English says.

“The share offer will raise $1.7 billion, which is a very good return for New Zealand taxpayers. Those proceeds will go into the Future Investment Fund, allowing the Government to control debt while continuing to invest in public assets. More details will be announced in next week’s Budget.

“The Government has achieved all of its objectives for the Mighty River Power share offer, so the company will list on Friday.

“Given the strong response to the share offer, and the price we have set, Mighty River Power will have a market capitalisation of $3.5 billion.

“And with over 110,000 New Zealand shareholders, it will have the largest share register – by some margin – of any New Zealand company on the exchange.”

Mr Ryall says that due to the strong level of demand, some scaling has been necessary.

“We have decided to apply progressive scaling, which means that larger applications are scaled more than smaller ones,” Mr Ryall says.

“That means that more than 80 per cent New Zealanders will get what they applied for.”

Yay, this means I’ll get all the shares I applied for. It also means I picked up the shares for around $600 cheaper than they might have been, thanks to Labour and Greens.

I will get 2,000 shares, which is 214 more than I would have got if the price was $2.80. Assuming the real value is $2.80 if the nationalisation policy never eventuates, then those 214 bonus shares are worth $600.

68% of applicants did not have a CSN number, which implies they are first time investors. That is great, because having more people invest in capital markets is a good thing.

Tags: ,

Massive fail for Labour and Greens

May 7th, 2013 at 3:29 pm by David Farrar

This is incredible. They spent around $400,000 gathering signatures for their asset sales petition, and they failed to get enough valid signatures.

They needed 308,753 valid signatures but fell short by 16,500.

That is a massive fail and gross political incompetence. They didn’t have to submit the petition when they did. They could have carried on getting more signatures to make sure.

Around 25% of their signatures were found to be invalid. That is a massively higher proportion than other petitions have had, and makes you wonder about their tactics. Did they sign up children? The Clerk has stated there were also duplicate signatures.

But surely they were intelligent enough to determine for themselves how many signatures were probably invalid, to work out how many they needed to collect. Both parties have access to an electronic electoral roll so they could have done exactly what the Electoral Commission did – take a sample of a few thousand names and check how many are on the roll.

Now the law provides that they can resubmit their petition with more signatures in the next two months, so if they persist, they can still qualify. But it means they have lost any moral claim that the Government shouldn’t proceed until the referendum – because they have failed (for now) to qualify.

It also means that the referendum may now occur after all the energy companies have been sold – making it even more of a farce.

It is bad enough they have wasted over $200,000 of taxpayer funding on trying to by signatures for their petition, and failed. Even worse to use more taxpayer money to gather the extra signatures and waste millions of dollars on a pointless referendum which may not even be held until a few months before the general election. They should instead go into the election with very clear policies on whether they wil buy back the shares or not and let the public decide at the ballot box.

I’m still staggered for now that despite spending $400,000 and having the entire memberships of the Labour and Green parties, and most unions, they proved unable to get enough valid signatures.  You could understand it if they were close to the deadline to submit – but they were not. They made a tactical decision to submit early for political posturing, and have ended up with egg on their face.

UPDATE: They claimed to have 400,000 signatures but got 292,250 valid ones. That means 107,750 were invalid which is a massive 26.9%. Maybe they should have put their paid petition gatherers on performance pay!

Tags: , , ,

Next Sale!

May 3rd, 2013 at 7:00 am by David Farrar

Stuff reports:

The Mighty River share offer does not close until tomorrow but plans already underway to sell stakes in the other two state owned electricity generators.

It appears Treasury is keeping the option of selling stakes two more companies later this year.

The Wall Street Journal reported overnight that the Treasury has called for investment banks to tender for leading roles in the partial privatisation of Meridian Energy and Genesis Energy. The report said pitches for the work were due by the end of this month.

This morning a spokeswoman for Treasury confirmed the agency was ”undertaking preparatory steps for the next IPO/s, including selecting JLMs [joint lead managers].”

She added: ”Ministers have indicated publicly that they would like to see at least one more IPO [initial public offering] in 2013, subject to market conditions and the preparedness of the companies.

”No decisions have been made about which company will be next, or the timing of any offer.”

I am really looking forward to the Meridian float. Their strategy to date has impressed me, and I think they will do well in future. I wish they’d spin off Powershop so I could buy shares in them directly also!

Final day to buy MRP shares is today. I reckon whatever price they are at below $2.80 will be down to the Green/Labour sabotage tactic. So if buying 2,000 shares and they are at say $2.50, then Greens and Labour will have saved me $600. I’m tempted to donate my savings to National as a campaign donation :-)


Herald says good time to sell Air NZ shares

April 29th, 2013 at 3:00 pm by David Farrar

The Herald editorial:

Air New Zealand’s soaring fortunes were confirmed last week when it flagged that its annual earnings would more than double this year. Normalised pre-tax earnings would be between $235 million and $260 million if current market conditions and the trading environment persisted, it said. Air New Zealand’s share price immediately shot up 8c to $1.52, signifying a 10 per cent rise this year. …

As it is, Air New Zealand may well hold more appeal, especially for the mum-and-dad investors the Government aims to attract. The airline industry has always had an allure despite the vast sums of money that have been lost in it, and the national flag carrier has a special place in the hearts of New Zealanders.

It has faced a multitude of problems in the past few years, including high fuel prices, landing fee increases, earthquakes in Christchurch and Japan, and discount competition. Yet it has managed to not only survive but to achieve a profitability more commonly associated with budget operators while maintaining a high standard of customer service.

A strong management team, headed by new chief executive Christopher Luxton, provides reason for confidence in the future, including a strong response to the challenge that will arise from the transtasman alliance between Qantas and Emirates, which awaits only the Transport Minister’s go-ahead. Jetstar is also talking of expanding its domestic network to regional centres, flying routes that it says are a “big profit play” by Air New Zealand. Balancing these threats to some extent is the benefit that the national carrier will undoubtedly gain from the Government’s $158 million boost for promoting tourism.

There are also practical reasons to encourage the Government to promote Air New Zealand. It is already listed on the stock exchange, so a prospectus will not be required. The selldown of the Government’s 73.4 per cent stake to 51 per cent will be more straightforward than those of the power companies. There will be no repeat of the late rewriting of Mighty River’s documentation.

If ever there is a time to sell shares in Air New Zealand, this appears to be it. Investors wary of the unpredictability of the airline industry may not touch it, but there is considerable appeal for mum-and-dad investors. It could offer succour as the Government licks its wounds.

I agree. The Government doesn’t even have to do it in one go. They can just release parcels of shares when the price is high.

I look forward to hearing intelligent arguments from opponents as to why the Government should own exactly 73.4% of Air New Zealand – not a share less or a share more. Tell us why it should not be 51% or why it shouldn’t be 95%?

Tags: , , ,

300 protesters made TV lead item

April 28th, 2013 at 1:00 pm by David Farrar

300 people marched in Auckland against asset sales. A miniscule number – 0.02% of the population of Auckland or 2 in 10,000.

Despite that, it was the lead item on TV news.

Slow news day?

Manufacturing news?

Tags: ,

Even if they win, the nationalisation may never happen

April 24th, 2013 at 1:00 pm by David Farrar

Stuff reports:

Professional investors, while still nervous of the proposal, have begun to question whether it will be implemented, even if the Opposition wins next year’s election.

AMP Capital’s head of equities, Guy Elliffe, estimates it will take at least five years to design and implement the plan, exposing it to the same policy about-face that has National so concerned.

“Most people think it is [going to take] more than one electoral term … but then what is the probability of a Labour-Green coalition being elected twice?” he asked.

Mr Moghe, meanwhile, has maintained his recommendation that investors subscribe to the share offer, which closes on May 3 for retail investors.

I think Mr Elliffe is largely correct.

To implement this policy, first Labour and Greens need to get 61 seats between them. If they have to rely on NZ First, he may not support the policy.

Secondly implementing the policy would be massively complex, probably the subject of huge litigation, and take years to do. It is most unlikely to be done in one term. And with Green/Labour policy veering radically leftwards (printing money, nationalising industries) the economy could be seriously tanking after three years.

But also look at who the Labour and Green energy spokespersons are, who would be the ones to implement this incredibly complex and controversial policy – Moana Mackey and Gareth Hughes. Now I like Moana and Gareth, but a policy like this would need a Michael Cullen or Steven Joyce to implement.

So I think the chances of this policy ever being implemented are in fact quite low.

Hence why I am increasing the amount of Mighty River Power shares I was planning to purchase. Thanks to Greens and Labour, they are likely to be priced more towards the bottom end of the indicated range. This means I’ll pick up the shares for a discount. This is of course bad for the taxpayer, but good for me as an investor. Thanks Russell and Davids.

Feel free to comment below if you are pre-registered and if you still plan to invest.

Note that this blog post is not financial advice.

Tags: , ,

The MRP share offer

April 5th, 2013 at 12:50 pm by David Farrar

Finally, it is out. The announcement:

New Zealand retail investors in the Mighty River Power share offer will receive one loyalty bonus share for every 25 shares they hold for two years from the offer, up to a maximum of 200 bonus shares, Finance Minister Bill English says.

Mr English also announced that the indicative price range for the shares is $2.35 – $2.80 per share, with the final price expected to be announced on 8 May after the retail offer has closed and the institutional offer has been conducted by a book-build process.

“The loyalty bonus scheme that I am announcing today is another way to encourage widespread and substantial New Zealand ownership of shares in MRP,” Mr English says.

“It also recognises the loyalty of those New Zealanders who retain their shares and contribute towards the country’s savings culture.”

The loyalty bonus scheme is available only to New Zealand retail investors – not to institutions in New Zealand or overseas.

A 1 in 25 bonus is basically a 4% premium for holding on. Experienced investors will buy and sell regardless as potential gains are greater than 4% but for first time investors, the bonus will probably encourage them to hold onto their shares for at least the initial period.

People who pre-registered will be posted or emailed copies of the share offer document once the offer opens, expected to be Monday 15 April.

686 million shares are up on offer.

A useful summary of risks is here:

  • The availability of the fuel (mainly water, geothermal fluid and gas) that Mighty River Power requires to generate electricity may reduce for a wide number of reasons;
  • Mighty River Power’s power stations may not be able to generate electricity as expected if they cannot operate in the normal manner or at all;
  • If the Tiwai Point aluminium smelter were to significantly reduce its electricity consumption or cease consumption altogether, the resultant drop in demand could lead to a sustained reduction in electricity prices in general;
  • The wholesale price at which Mighty River Power sells the electricity it generates, or buys electricity to sell to customers, is subject to significant variability and may be unfavourable;
  • The volume and price at which Mighty River Power is able to sell electricity to customers may be adversely affected by competitor behaviour, economic conditions, changes in customer demand or regulatory changes;
  • Investment in geothermal development activity requires significant early stage capital and may encounter unexpected delays, increased costs, a requirement to impair assets or not be commercially viable;
  • International geothermal development faces additional risks associated with operating in jurisdictions outside of New Zealand;
  • Changes in the regulatory environment that adversely impact Mighty River Power;
  • A single (or multiple) catastrophic event generating losses not covered by insurance;
  • Insufficient access to future capital; and
  • Treaty of Waitangi and other Māori claims relating to ownership and governance of land, water and geothermal resources that directly or indirectly impose additional restrictions, conditions or additional costs

I plan to buy shares, despite those risks. There are no rewards without risk. I’m pleased that I will be able to make an individual choice as a citizen about whether to invest my money into Mighty River Power, rather than have the decision solely up to the Government,

Tags: ,

Meridian and Tiwai Point

April 5th, 2013 at 11:00 am by David Farrar

Stuff reports:

Southland Chamber of Commerce chief executive Richard Hay urged people to consider what was really going on.

Pacific Aluminium, a business unit of Rio Tinto and the majority shareholder of New Zealand Aluminium Smelters, had been perceived as playing hard ball, he said.

“If anybody was getting the short end of the stick, it would appear to be the smelter.”

Rio Tinto was shown as begging from the Government and using the Mighty River Power partial asset sales policy as leverage to get what it wanted, he said.

“However, has any consideration been given by the public that it’s Meridian playing hard ball.

“After all, it has been making a yearly profit of $200 million off the Manapouri power generator, while NZAS is losing $50m and is in the shadow of closing,” Mr Hay said. …

“Rio Tinto wants Meridian to reduce the power price in tough times but be prepared to pay more for it again when the market improves.”

I understand that essentially Rio Tinto want the price they pay for electricity to be linked to the price they get for aluminum. This is very understandable from their point of view. Electricity makes up over 30% of their operating costs.

What they are effectively asking Meridian to be more a partner than a supplier. To share both the risks and rewards of the aluminum market.

While Meridian is 100% Government owned, I’d be very reluctant to have a Government owned business getting involved in a risky commercial enterprise such as aluminum – beyond their current role as a supplier. Why should taxpayers be forced to invest in the aluminum market?

But if Meridian was fully or partially privately owned, then Meridian shareholders could well want their Board of Directors to accept a deal where the price they charge is linked to the aluminum price.

So my hope is that Meridian and Rio Tinto can reach an agreement for now. Once Meridian is no longer an SOE, then it should have greater flexibility to consider variable price agreements.

Tags: , , ,

Comments on Tiwai Point

April 2nd, 2013 at 3:00 pm by David Farrar

Some interesting comments were made yesterday on the Tiwai Point thread, with people disagreeing with me that the Government should not be involved:

Jack5 said:

In a detailed post by “Tempest” in Kiwiblog yesterday, is was spelled out that the new infrastructure required to put Manpouri’s electricity on the NZ market would cost $2 billion and would take eight to ten years to complete.

DPF thinks the SOE board should negotiate this contract. This is about more than some electricity price subsidy. How would Meridian raise $2 billion to bring Manapouri electricity north with a wait of six to eight years before it received any revenue from this spending?

There’s a better case for the Government negotiating here than there was for its role in helping the film industry. And there were film-industry tax subsidies (yes, special industry tax breaks are subsidies), as well as labour rules involved.

The aluminium industry is in upheaval round the world thanks to a dive in demand and prices, and rising competition from China. Australia and New Zealand have a special difficulty because of the two countries well overvalued currencies.

In France the French Government is working with Rio Tinto and local community representatives and unions to try to find a buyer for Rio Tinto’s aluminium smelter at Saint-Jean-de-Maurienne.

Finding a buyer for Bluff, might be harder, however. In Australia, Norsk Hydro announced 12 months ago it was closing its aluminium smelter at Kurri Kurri. Alcoa’s smelter in Victoria is staying open for two years, thanks to a state-federal subsidy.

If Australia is bailing out its smelters, NZ will have to follow or lose a billion a year in foreign currency earnings. It would also have to raise $2 billion for new infrastructure, and spend heaps on social support in Southland (just as it props up farmers in droughts and kiwifruit farmers in disease outbreaks).

Too much is at stake with the smelter to leave it to a State-appointed board.

However, that is where it is. Stuff reports:

Mining giant Rio Tinto has walked away from talks with the Government over the future of Tiwai Point aluminium smelter, Prime Minister John Key has confirmed this morning.

Key said Rio had withdrawn after nine months of negotiations over possible taxpayer subsidies and had now resumed discussions with state-owned power company Meridian.

It was revealed last week the Government had been negotiating with Rio Tinto over the smelter after contract negotiations between subsidiary Pacific Aluminium and Meridian effectively stalled.

The Government had made it clear there would be no long-term support, but agreed to look at short term bridging assistance because of the thousands of jobs at stake, and to facilitate a smoother transition should Tiwai Point close, Key told TV3’s Firstline.

“We made the call that we would look to help bridge a small amount of that gap for a short period of time.

“They came back over the weekend and said ‘no, we are rejecting the Government’s intervention; we will go back and talk to Meridian’. So that’s what they are doing now.”

He acknowledged ultimately that might mean Tiwai Point closed.

Just as Solid Energy suffered due to low global coal prices, Tiwai Point suffers from low global aluminum prices. There is a limited amount one can do locally in the face of global price changes.

This reinforces to me why the state shouldn’t be in commercially risky enterprises. Why should I as a taxpayer be carrying some of the risk around global aluminium prices? If Tiwai Point closes, it will reduce the value of the energy SOEs.

Rio Tinto apparently decided to walk away after the Government made it clear it would not subsidise the deal long-term.

Key confirmed this morning the Government had no interest in that.


Tags: , , ,

Gaynor on how mixed ownership can be a win-win

March 30th, 2013 at 2:00 pm by David Farrar

An excellent column by Brian Gaynor:

The writer expressed his strong opposition in the following way: “The [asset sales] represent asset stripping. They are publicly owned by everyone, including poor people. The dividends they produce will no longer be returned to the population as a whole but to a small, wealthy minority. There is no innovation or expansion, just a continuation of the rich getting richer, and the poor poorer”.

Gaynor first points out:

The first point is that the sale of 49 per cent of MRP to 300,000-plus New Zealanders is not asset stripping as none of the company’s assets will be sold for the benefit of the Crown or the new minority shareholders.

And in fact a mixed ownership model will allow the former SOEs to acquire more asset and expand, if they so wish.

The second point is that the Government will continue to receive 51 per cent of MRP’s dividends and the payout should increase in the years ahead.

Port of Tauranga is a good example of this.

The Mount Maunganui company listed on the NZX in March 1992 after the public acquired a 44.7 per cent shareholding. The Bay of Plenty Regional Council owned the remaining 55.3 per cent.

Port of Tauranga paid a total dividend of only $2.2 million in the year before its NZX listing and the Regional Council’s shareholding was worth just $44 million at the $1.05 a share IPO price.

Twenty years later the Bay of Plenty Regional Council’s economic interest in the port company has increased as follows:

The council’s shareholding has declined from 55.3 per cent to 54.9 per cent but the value of its holding has soared from $44 million to $1.015 billion.

The council now receives an annual dividend of $34.6 million from the port company compared with just $2.2 million when it owned 100 per cent.

This is the model that the unions and their allies have tried to destroy.

Everyone is a winner – the Bay of Plenty Regional Council and its ratepayers, Port of Tauranga’s minority shareholders and the company itself.

It is totally inappropriate to look at partial privatisation as a zero sum game, a game where there must be a loser for every winner. Partial privatisation can lead to a substantial increase in value and income for a regional council, or the government, if the listed company is well governed and managed.

Absolutely. There can be no argument that privately owned and managed companies do better overall than wholly owned public ones. By this I do not mean no private companies fail and no public companies succeed. Of course not. But if you look at decades of economic data across OECD countries, the difference is stark.

And Gaynor gives a local example:

In the following 12 years, before the company was taken over by its majority shareholder, the Auckland Regional Council’s economic interest increased as follows:

The council’s shareholding remained at 80 per cent but the value of its holding soared from $318 million to $678 million at the $8 a share takeover price

The council’s annual dividend from the port company jumped from $8.5 million to $34.3 million.

The company’s performance has been poor since it was fully acquired by the Regional Council, now Auckland City, in 2005.

Auckland City’s annual dividend has fallen from $34.3 million in 2005, when it owned 80 per cent of the company, to $20.1 million in the June 2012 year, even though it now has 100 per cent ownership.

When a company is 100% owned by the Government (or a Council), it will make sub-optimal decisions due to influence of the shareholder.

If they are listed on the NZX they have a legal duty to treat all shareholders equally and do what is best for the company as a whole. If the major shareholder wishes to influence their decisions they have to do so transparently through public shareholder resolutions.

Tags: , , ,

Would the closure of Tiwai Point impact the sale prices?

March 30th, 2013 at 11:00 am by David Farrar

Tamsyn Parker at NZ Herald reports:

Analysts said the negotiation issue could have a small negative effect on the pricing of Mighty River Power’s shares.

Milford Asset Management senior analyst William Curtayne said the situation would probably result in the bankers having to alter the pricing of the offer moderately.

For those looking to buy Mighty River Power shares it could mean the company would now be cheaper.

But Mighty River Power was still a great company which was giving off a lot of cashflow compared with what savers could get by putting their money in the bank.

Curtayne said it might also be good news for Meridian in the long term.

He said if the company pulled out of selling power to Rio Tinto, it could sell the power to other energy companies such as Genesis or Contact which would enable them to shut down more expensive operations like the Genesis-owned Huntly and Contact’s Otahuhu power station.

“It sounds bad at the headline. But in the long run if the market reacts effectively we could end up with a relatively benign outcome.”

Curtayne said it was better that the situation be revealed now.

“It’s good for them to come out and signal where they are now. It gives the situation more clarity.”

He said it could mean the Government got less money for Mighty River Power, but more for Meridian, which is worth twice as much.

Devon Funds Management analyst Phillip Anderson said it would affect the price of Mighty River Power at the margins.

Even more reason for the Government to stay out of this, and leave the negotiations to Meridian.

Tags: , , ,

A misleading headline

March 24th, 2013 at 3:00 pm by David Farrar

The SST headline:

Call to ban ministers from share float

Except they already are. Ministers absolutely can not take part in the share float.

In fact the conflict of interest obligations are taken so seriously that when Contact Energy was sold in the late 1990s, I was one of those banned from buying shares when it floated as I worked in the PM’s Office. Now I had zero involvement in the float, saw no papers about it, but still was banned.

So a headline that suggests Ministers are not already banned is absolutely misleading.

We asked our readers if they wanted a similar rule to Australia’s “Standards of Ministerial Ethics” that require ministers “to divest themselves of all shareholdings other than through investment vehicles such as broadly diversified superannuation funds or publicly listed managed or trust arrangements”.

That is a very separate issue to the suggestion that Ministers can take part in the Mighty River share float.

Incidentally I think it is a good idea for Ministers to follow the lead of the PM and put their shareholdings in a blind trust. But a one size fits all rule may be overly prescriptive  You may have a Minister who has say 10,000 shares in one company prior to becoming a Minister and requiring them to set up a Trust for such a minor shareholding could be a bit over the top.

Tags: , , ,