The fate of New Zealand’s asset-sales program may rest on the performance of one stock.
Meridian Energy Ltd., the biggest of four state-owned companies in the program, rose to NZ$1.09 on debut in Wellington today from its NZ$1 issue price after the largest initial public offering in New Zealand’s history. The shares were priced at the bottom of the government’s projected range after Mighty River Power Ltd., the first of the IPOs in the sovereign sell-off, fell from its listing price.
“If it still doesn’t perform, then you’ve got some really big concerns,” Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research in Wellington, said about Meridian. “It’s going to be very closely watched and if it doesn’t go well they’re going to find it really hard” to proceed with further asset sales, he said.
Prime Minister John Key’s government is selling stakes in state companies to fund infrastructure and reduce debt that spiraled after the global financial crisis. He may struggle to reach the targeted NZ$5 billion to NZ$7 billion after Meridian raised less than forecast and loss-making Solid Energy New Zealand Ltd. dropped out of the sale program.
In an effort to boost interest in Meridian, the government sold the shares as installment receipts, allowing investors to pay NZ$1 upfront and the remainder 18 months later while receiving full dividends. The partly-paid shares began trading at NZ$1.08 today.
‘The big one’
“It’s done pretty well for its first day,” said James Lindsay, who helps oversee $21 billion at Tyndall Investment Management Ltd. in Auckland “This was the big one in size terms for Key and they’ve priced it reasonably.”
Meridian’s full shares priced at NZ$1.50, the bottom of the indicative NZ$1.50-to-NZ$1.80 range, raising NZ$1.9 billion from the 49 percent stake sold. As recently as May, Key said the IPO would raise about NZ$3 billion.
Demand may have been damped by the performance of Mighty River, New Zealand’s fourth-biggest power company, which traded at NZ$2.19 today compared with its NZ$2.50 listing price. That IPO in May raised NZ$1.7 billion.
The government next plans to sell down its shareholding in national carrier Air New Zealand Ltd. to 51 percent from 73 percent and divest as much as 49 percent of Genesis Energy Ltd. in another IPO.
‘Future floats’
“If the performance of the Meridian stock is positive, it’s going to assist the future floats,” said Ganesh Nana, executive director and chief economist at business and economic research company BERL in Wellington. “If the stock did poorly, that would make it a lot more difficult and one would think it would make the government rethink its strategy.”
Meridian is New Zealand’s biggest power company, with seven hydroelectric dams and four wind farms generating about 30 percent of the country’s electricity needs. It also has a wind installation in Australia and another under construction.
Finance Minister Bill English said last week that some investors were scared away from Meridian by the opposition’s plan to reform the electricity market if it wins the next election, due in late 2014.
Even so, it was the largest investment in an IPO by retail investors and “a real boost for New Zealand’s capital markets and our economy,” English said, adding the government intends to press ahead with the asset-sales program.
Key’s defense
Key also defended the program today, telling TV3 that if Solid Energy had been partly privatized, “it may well not have gotten itself in the mess it did.”
Key outlined the government’s asset-sales plans prior to the 2011 general election, in which his National Party gained its best result in 60 years. Proceeds from the IPOs go to the Future Investment Fund, with NZ$1 billion earmarked for each of health and education, according to apress release announcing the Meridian sale in May.
New Zealand has about NZ$73 billion of sovereign debt outstanding, up from NZ$42.6 billion in the final quarter of 2009, data compiled by Bloomberg show.
It may be a challenge to entice investors to another energy stock now that four large power companies — TrustPower Ltd., Contact Energy Ltd., Mighty River and Meridian — are listed.
Genesis challenge
“Air New Zealand I think they’ll be able to sell quite easily, it’s whether they go ahead with Genesis,” said William Curtayne, senior analyst at Milford Asset Management in Auckland. “If Meridian goes on an absolute tear, Genesis will be easier to get away. If it doesn’t, then it’ll be difficult and they’ll have to sell Genesis very cheap.”
The Treasury advised the government to keep offerings below NZ$3 billion in any 12-month period to ensure the New Zealand stock market could absorb the listings, according to a March 2011 document published on its website.
“By flooding the market with electricity companies, against the advice of Treasury, National has reduced the revenue the Crown received from the sales,” Green Party co-leader Russel Norman said today. “Pushing ahead with the sale of Genesis and Air New Zealand in the coming months, hard on the heels of the failed Mighty River and Meridian sales, would be completely irresponsible.”
Investor sentiment
In addition, investor sentiment has turned away from defensive stocks in favor of more growth-oriented companies, according to Curtayne. The NZX 50 Index (NZSE50FG) rose to a record on Oct. 23 and has advanced 20 percent this year.
“There are other options,” Curtayne said. “Potentially you could break Genesis up and sell it to the existing listed companies without going to the market.”
Still, one of Key’s rationales for the privatization program is to encourage New Zealanders to invest in assets other than property. House-price inflation is running at the fastest pace since early 2008 and the central bank this month imposed limits on low-deposit home loans.
The asset-sale program “hasn’t been successful in doing that,” said BERL’s Nana. “While you shouldn’t be looking at the short-term performance of Mighty River Power, you can’t get away from the public perception that it’s failed. That’s another reason why most New Zealanders won’t go near the stock market.”
In May last year, the Treasury estimated that as many as 250,000 people might participate in each of the flotations.
Of the 440,000 people to pre-register for Mighty River shares, only 113,000 bought them. The Meridian IPO attracted 62,000 investors, the government said last week.
Meanwhile, opposition parties have forced the government to hold a referendum on the asset sales by getting 10 percent of eligible voters to sign a petition. The referendum will be conducted by post from Nov. 22 through Dec. 13.
Even if the Meridian shares do well in coming months, the government faces an uphill battle, said Eaqub from NZIER.
“Either it’s underpriced and you gave it away, or it’s too expensive and they’ll say you’re stealing from hard-working mums and dads,” he said. “There is no way to win when you’re selling the family silver.”
