The New Zealand government will seek to raise about NZ$2 billion ($1.7 billion) from the sale of a 49 percent stake in Meridian Energy Ltd. by October, in the country’s largest initial public offering.
The offer price for shares in New Zealand’s biggest power company will be in a range of NZ$1.50 to NZ$1.80, according to a prospectus published today in Wellington. Shares will be sold as installment receipts, with NZ$1 to be paid upfront and the balance paid 18 months later. New Zealand applicants will pay no more than NZ$1.60 a share.
The IPO is the second in a government asset-sales program that aims to raise about NZ$5 billion by the end of 2014. The first of the companies sold this year, Mighty River Power Ltd., is trading below its IPO price on concern that a possible change of government next year may trigger increased industry regulation and that the possible closure of the nation’s only aluminum smelter in 2017 may depress wholesale power prices.
“You can obtain a fair value for the company within that range,” said Rickey Ward, an Auckland-based portfolio manager at Tyndall Investment Management Ltd. “The same risks that existed for Mighty River ironically still exist today for this company.”
Mighty River shares rose 3 cents to NZ$2.23 at 3:15 p.m. in Wellington. They were sold in May at NZ$2.50 apiece.
The government has sweetened the Meridian float to increase the initial yield and boost demand, and the price range “reflects of course on some of the experience of the Mighty River price,” Finance Minister Bill English told reporters today. “The offer is structured to be attractive to retail investors. We feel pretty confident about the demand for this float.”
Meridian is forecasting a dividend of 10.5 cents a share in the year ending June 30, 2014, and 11.5 cents a share the following year, according to the prospectus.
The gross yield based on the NZ$1 initial payment is 13.4 percent over the first 12 months. The gross yield based on the offer price range is 7.4 percent to 8.9 percent in 2013-14 and 8.2 percent to 9.8 percent a year later.
Gross proceeds from the first installment would be NZ$1.26 billion assuming the full 49 percent stake is sold, the government said today. Second installment proceeds will be determined by the final price set by institutional bidders and a mix of funds and small investors. That would be about NZ$755 million, assuming a final price of NZ$1.60.
The final price will be announced Oct. 23 and Meridian is scheduled to begin trading on the New Zealand and Australian stock exchanges on Oct. 29.
Meridian isn’t an Apple Inc. or a Microsoft Corp., Meridian Chief Executive Officer Mark Binns said in an interview before the announcement. “No one should be perceiving this as a stock that’s going to double or triple in value inside a couple of years. But we’re a solid company performing well and generating very solid cashflows, which we would foresee translating into good dividend yields.”
Meridian owns seven hydro-electric dams and four windfarms in New Zealand, generating about 30 percent of the country’s electricity needs. It has a wind installation in Australia and another under construction. It’s selling a solar plant in California.
With electricity supply in New Zealand outstripping demand, “we’re not going out there trying to sell a growth story,” said Binns, who is scheduling meetings with investors in New Zealand and overseas to promote the IPO.
The company today forecast operating earnings of NZ$548.4 million for the year through June, down 6.2 percent from a year earlier.
One of the two risks looming for New Zealand power generators is the possible closure of the Rio Tinto Group and Sumitomo Corp.-owned Tiwai Point aluminum smelter, Meridian’s biggest customer and the buyer of about 40 percent of its electricity.
The owners’ commitment to the smelter expires in January 2017, and the government had to contribute NZ$30 million to secure the recently renegotiated contract.
The loss of such a big customer would likely force some less efficient generators out of the market, Binns said. Still, Meridian owns Manapouri, “New Zealand’s most efficient power station,” so “in relative terms we don’t imagine we’d be the worst off,” he said.
The other risk is the prospect of revised market regulation should the opposition Labour and the Green Parties win the next election, slated for late 2014.
The opposition parties have said they would create a state agency to buy wholesale electricity at a regulated price and split the retail and generation units of existing utilities.
The current government is selling assets to generate cash for investment in infrastructure and reduce debt. It has said it will sell shares in Genesis Energy Ltd. in the first half of next year, while the sale of shares in Air New Zealand Ltd. will occur before the election.
Meridian’s share offer will be open from Sept. 30 and close on Oct. 18.
The lead managers for the sale are Goldman Sachs Group Inc., Macquarie Group Ltd. and a partnership of Deutsche Bank AG and Craigs Investment Partners. The government has also named ASB Bank Ltd., ANZ Bank New Zealand Ltd. and Forsyth Barr to a retail syndicate to help market Meridian shares.