Mighty River Jumps on Debut of New Zealand’s Biggest IPO

Mighty River Power Ltd. rose 4.8 percent on the debut of New Zealand’s biggest initial public offering, rewarding investors and supporting Prime Minister John Key’s asset sales program.

The utility closed at NZ$2.62 in Wellington, compared with the NZ$2.50 offer price, valuing the Auckland-based company at NZ$3.67 billion ($3.1 billion). The government, which retains a 51 percent stake, raised NZ$1.7 billion from the IPO.

Key plans to generate NZ$5 billion to NZ$7 billion selling shares in state-owned companies to help reduce the need for borrowing after the budget deficit reached a record on spending following the 2011 Christchurch earthquake. The sale of stakes in Meridian Energy Ltd., Genesis Power Ltd. and Air New Zealand Ltd. will follow.

“Investors have an appetite for well-structured, well-positioned, well-priced investments in New Zealand,” said Shane Solly, equities portfolio manager at Mint Asset Management Ltd. in Auckland. “Depending on the market conditions in the next year or so, there should be a reasonably solid demand for more assets coming out of the New Zealand government.”

Mighty River traded opened at NZ$2.73, which was the high for the day, and closed at its low. More than 69.9 million shares changed hands.

Before Mighty River’s offering, 29 companies completed IPOs worth at least $1 billion each in the past 12 months across the world, according to data compiled by Bloomberg. These companies closed on average 6 percent higher on their first day of trading, the data show.

Next Sale

Key has signaled he wants to sell stakes in either Meridian or Genesis this year.

“It’s highly likely there’ll be another float this year,” Finance Minister Bill English said today in an interview with Bloomberg Television, adding that an announcement will be made in the May 16 budget. “Market conditions are pretty good, the New Zealand economy is building at around 3 percent growth and business confidence is rising.”

The sale of Mighty River - which operates nine hydro plants on the Waikato, the nation’s longest river - has been opposed by indigenous Maori tribes.

They claimed it violated the 173-year-old Treaty of Waitangi, New Zealand’s founding document, which may give them rights over land, water, steam and wind resources. A court rejected a claim by the Maori Council in February that would have delayed the IPO while indigenous rights are assessed.

Schools, Roads

Sale proceeds will go into a fund to be used to pay for investment in new schools, roads and reconstruction in Christchurch without requiring the government to raise more debt, English said earlier.

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.

Opposition Plan

The 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 election next year. 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 utilities.

“Details are scant and people can’t work out how it will be implemented,” Andrew Bascand, managing director of Harbour Asset Management Ltd. in Wellington, said of the opposition plan.

The Labour Party and the Green Party, which backs the opposition proposal, attracted combined support of 41.5 percent in a Reid Research poll for TV3 in early April. That compares with 49.4 percent for Key’s National Party.

The shares were also 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.

‘Tickly’ Issues

“The next ones aren’t at the moment necessarily ready to run,” Bascand said. “Meridian and Genesis both have tickly little issues. All roads lead back to discussions with Rio, you’d have to put that to bed thoroughly.”

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.

Mighty River projects a dividend of 13 cents a share next year, a yield of 5.1 percent on its offer price. It’ll pay a dividend of 12 cents this year.

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

Still, all power companies are also operating in an environment with flat demand for electricity which may limit earnings growth because there is surplus capacity in the industry, he said.

Slow Growth

“No one has any growth in electricity prices for generators in their models going forward for some time,” he said. “Will 13 cent dividend grow in years to come? It’s unlikely to grow through prices.”

Mighty River also operates five geothermal stations and the natural gas-fired Southdown plant near Auckland. It sells power to about 20 percent of New Zealand homes, mainly through retail unit Mercury Energy.

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.

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