Mighty River Sale Takes Key Toward New Zealand Budget Goal

New Zealand Prime Minister John Key moved closer to eliminating the budget deficit with a NZ$1.7 billion ($1.4 billion) sale of Mighty River Power Ltd. shares in the nation’s biggest initial public offering.

The government, which will retain a 51 percent stake in the Auckland-based utility, sold the shares at NZ$2.50 each, Finance Minister Bill English and State Owned Enterprises Minister Tony Ryall said yesterday. The price compares with the indicative range of NZ$2.35 to NZ$2.80 given last month.

Key plans to raise NZ$5 billion to NZ$7 billion selling shares in state-owned companies after the budget deficit reached a record on spending following the 2011 Christchurch earthquake. He also plans to offer stakes in Meridian Energy Ltd., Genesis Power Ltd. and Air New Zealand Ltd., banking on demand for higher yielding assets as the nation’s interest rates sit near record lows.

“It’s an encouraging development, particularly if they are able to achieve their target,” said Art Woo, director of Asia sovereign ratings at Fitch Ratings in Hong Kong. “It does show they are making efforts to stabilize their public debt-to-GDP ratio, which has risen over the past five years.”

New Zealand is targeting a return to budget surplus by 2015 after the deficit became as wide as NZ$18.4 billion in the 12 months ending June 30, 2011. The government forecasts a gap of NZ$7.34 billion in the current year. The country lost its top credit rating at Standard & Poor’s and Fitch Ratings in 2011, prompting Key to focus on debt reduction.

Sale Proceeds

“Proceeds will go into the Future Investment Fund, allowing the government to control debt while continuing to invest in public assets,” English said in a statement.

The sale values Mighty River at NZ$3.5 billion, making it one of the largest members of the New Zealand stock exchange. The company projects a dividend of 12 cents a share this year, a yield of 4.8 percent. That compares with 2.8 percent at Contact Energy Ltd., the largest publicly traded New Zealand power company with a capitalization of NZ$4.11 billion.

More than 113,000 New Zealanders will hold shares in Mighty River, which begins trading on May 10, according to the statement.

“The whole exercise and the success of it will build the confidence of retail investors that this is something that they can do,” English told reporters. “We believe they will be looking for further opportunities.”

Future IPOs

English declined to comment on the timing of the next IPO, adding it is “possible” details will be included in his May 16 budget.

The demand for the shares particularly from overseas investors was such that the government “could have done all three” power company sales last night, said Andrew Bascand, managing director of Harbour Asset Management Ltd. in Wellington.

“Globally, the bidding went ridiculous,” he said. “They got scaled massively.”

Of the shares issued, 86.5 percent will be New Zealand owned, including 26.9 percent by retail investors and 8.6 percent by institutions, according to the statement. The government will retain a majority 51 percent shareholding and about 13.5 percent will be held by overseas institutions.

The sale values Mighty River at NZ$3.5 billion, making it one of the largest members of the New Zealand stock exchange. The company projects a dividend of 13 cents a share next year, a cash yield of 5.1 percent.

‘Reasonable Yield’

“Its not a big growth industry so needs to have a reasonable yield,” said Bascand. “We like these things over 5 percent, it looks alright.”

About 440,000 people pre-registered their interest in receiving offer documents before the IPO was announced on April

5. The three-week offer period ended May 3 and the final price was reached after an institutional auction closed yesterday.

The sale is the largest in Australia or New Zealand since Aurizon Holdings Ltd., the rail company formerly known as QR National Ltd., raised A$4.05 billion ($4.13 billion) in November

2010. New Zealand’s previous biggest IPO was the government’s NZ$1.1 billion sale of 60 percent of Contact Energy in 1999.

Mighty River operates nine hydro plants on the Waikato River, the nation’s longest, five geothermal stations and the natural gas-fired Southdown plant near Auckland. It sells power to about 20 percent of the nation’s homes, mainly through retail unit Mercury Energy.

Lead Managers

The lead managers of the offer were Goldman Sachs Group Inc., Macquarie Group Ltd., and a partnership of Credit Suisse Group AG and First NZ Capital Securities. JB Were (NZ) Pty, Craigs Investment Partners Ltd. and Forsyth Barr Ltd. managed the retail share offer.

Key’s government was forced to make a supplementary disclosure last month after opposition parties said they would revise regulation of the industry if they form a government after the 2014 general election. Their proposal includes creating a state agency to buy wholesale electricity at a regulated price, and also envisages splitting the retail and generation units of existing companies.

Bascand lowered his bid range for Mighty River by about 10 percent to reflect the uncertainty the opposition proposals put around future earnings.

The shares were offered amid contract negotiations between Meridian and Rio Tinto Group Ltd., the majority owner of the nation’s only aluminum smelter, which used about 13 percent of national power output last year. Demand would slump if Rio closed the plant and companies such as Genesis may respond by shutting some generation sites, Bascand said.

“Meridian and Genesis both have tickly little issues,” he said. “All roads lead back to discussions with Rio, you’d have to put that to bed thoroughly.”

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