IPO: Col, Mer, Gen, MRP

[minimoke]

So the govt is flagging the possibility of four new IPO's. Solid Energy, Meridian Energy, Genesis Powers and Mighty River Power.

Heres why John Key thinks its a good idea.

New, quality listings on the stock exchange would give "mum and dad" investors the option of putting their savings into large and proven companies, rather than relying, as is so often the case, on property investments.

The second is that the company reaps the benefits of sharper commercial disciplines, more transparency and greater external oversight.

Under the mixed ownership model Air New Zealand has been a creative and innovative company and a model corporate citizen. It has also offered some very competitive prices for air travel.

I am convinced that Air New Zealand would not be run as well, nor provide as good a service to customers, if it was owned 100 percent by the government.

And the third potential benefit is the opportunity for the companies involved to obtain more capital to grow further, without depending entirely on a cash-strapped government to support them.

Point One: Mums and Dads already have an opportunity to invest in large proven companies. Theres a few on the NZX and the ASX is not too hard to do. Sharp mums and dads haven't had all their money in property investments.

Point Two. Sharper commercial disciplines have been evidenced by the finance sector which has lost around $4b. NZ Rail had some pretty sharp commercial discipline applied to it. AIR didn't do so well. TEL has eroded shareholder value since listing. And AIA were prevented from maximizing their asset by the intervention of govt - and thats just to name a few.

Point Three. These companies do not need to go to govt cap in hand. Meridian for example recently raised $200m through retail bonds.


How about as been suggested by PTC on the "NZX Joke thread" a merger of the three power companies into a Super company?

Disc: might have been bullish if there was going to be a 100% listing. Not so sure if I'm so interested in govt holding a majority stake.

[CJ]

To get this going, I would be for it. I think they should do it in steps (ie. 25%), not one big lump (ie. 49%) and not all in the same year. Good for the economy, good for Mums and Dads, gives something for kiwisaver/superfund to invest in.

Bernard Hickey made a good post today though - the companies pay 7.5% div on average and government borrows at 5.5% - why sell.

[minimoke]

good for Mums and Dads,
To be good for mum and dads the sale of assets firstly has to be palatable to electors. One way of making the message voter friendly is to ensure the IPO sale price is acceptable to mums and dads - this means selling at a price mums and dads will ant to pay. This means selling at a discount or not at full value.

I seem to remember the electricity reforms of the electricity market were going to be good for mums and dads - not sure what we have today achieves that ambition. The three SOE's are paying $170 for every man woman and child in NZ as a dividend to Govt.

[J R Ewing]

I have to say I'm a bit ambivalent. Philosophically I think there is no need for the government to be in the electricity business. But selling off productive assets to reduce debt doesn't sound all that sensible. Presumably someone else could then debt fund part of the purchase and make a profit. If that profit goes overseas then what does NZ gain?

[POSSUM THE CAT]

If you are getting a return of 1.5% more than cost of financing it you would be mad to sell it. Especially if you have three companies in the same industry doing this the case for rationalization of three companies into one.The saving in management costs alone make this imperative. Partial sale of these assets is A sign of Stupidity.

[Placebo]

Yes and to sell it back to the taxpayers, who already own it... hmmm.

I think it is about time AIR went on the block. Philosophically I am not opposed to selling off state assets and getting Government out of business. The devil is in the detail. I think the political question can be sold. People's views are very much tainted by what happened with the likes of NZ Rail. An appalling piece of business all the way through (North and South had a very good article on how the taxpayer got screwed by Rail's house sales programme in late 80s), right up to the Fay Richwhite debacle. I think people will feel a bit more comfortable with Govt continuing to own a chunk. Having said that, Governments can hamstring private companies and still influence decisions. Look at what happened with AIA when the Canadians came shopping.

Is a gamble by Key for sure, he seems happy to stake the election on it - Stuff poll today has 63% against asset sales. May be a bridge too far even for Smiling John.

[Arbitrage]

Can someone please define who these "Mums and Dads" are?

[CJ]

Can someone please define who these "Mums and Dads" are? It is a generic term*. Mary Holme divoted part of her column to it once trying to come up with a better name.

* I know you know this already.

So what would you have them called: The average person. non professional investor.

[Placebo]

Can someone please define who these "Mums and Dads" are?

They live in "Middle New Zealand", have 2.4 kids and a labrador, and drive a pale green/blue Honda Oddysey.

[J R Ewing]

They live in "Middle New Zealand", have 2.4 kids and a labrador, and drive a pale green/blue Honda Oddysey.

Their most important characteristic is that they have no fixed allegiance to any particular political party!

[Casa del Energia]

Flog em off before they are worthless. Solar power per watt 2001 - USD5.50, 2005 $4.80, Jan 2011 $3.38. When it gets to $2, power stations, even hydro during the wettest summer in history wont be competitive - - especially with the extra costs stacked on by our idiotic electricity market - - and just for the record, I resent having 41cents added onto my bill for effectively brokerage.

May they all sink into oblivion (but only after they are sold to overseas institutionals).

[minimoke]

In this context they are heartland voters. They are the ones govt does not want to upset and loose votes. They are the ones who can be "bought" by offering inducements and don't see beyond the inducement. So a citizen offered cheap shares in Meridian so they can reap a regular dividend income and sustained capital growth becomes a "mum and dad" investor.

They are the same people that think allowing a visiting American navy ship with 5,000 personnel on board is a really akin to doing a deal with the devil if that ship is nuclear powered. A Chinese vessel is of course fine because human rights and democratic principles are things the devil isn't interested in. And of course its a visitor - not a Chinese purchaser which is a bad thing - not quite as bad as nukes but up there.

[macduffy]

Can someone please define who these "Mums and Dads" are?

What was wrong with the old term "retail investors"?

Disc: Retail investor.

[darksentinel]

What was wrong with the old term "retail investors"?

Disc: Retail investor.

"Mums and dads" sounds more personal, down-to-earth, colloquial and is something that everyday New Zealanders have a chance to identify with (vs. "retail investors", which reeks of a capitalist elite, and at best is a pretty technical term). When you're in politics or similar the spin you give your delivery is Key (pun intended) for obtaining the support of oft-fickle, emotionally-driven voters,
(blunt oversimplification)

Disc: retail investor :P

[Waiuta]

Has anyone got any better idea how we can reduce our $300m weekly interest bill as well as increase our productivity to get
up the OECD ladder?


A quote attributed to Margaret Thatcher goes along the lines of
"The problem with socialism is that eventually you run out of other people's money."

[macduffy]

Fair enough, darksentinel. I seem to remember that the term was in use during Margaret Thatcher's "privatisations". That doesn't make it any better IMO.

Disc: Everyday New Zealander retail investor!

[POSSUM THE CAT]

Waiuta How did we get out of the great Depression. Agood start would to make it compulsory to have at least 30% deposit to buy anything on credit & I include housing in this. And I would suggest raising the OCR by 1% to encourage saving. Also taxing trusts the same ways as the Australians do. 90% of trusts would then be dissolved as they would no longer be of any use as Tax avoidance vehicles

[macduffy]

Banks have already tightened borrowing criteria and I suspect that requiring a 30% deposit on housing would just about be the death knell of an already badly depressed building industry. And very little point in raising the OCR, other than to encourage an already strong NZD. Commentators have been pointing out for a while now that the margin for deposit rates over the OCR has moved beyond "normal", reducing the relevance of the OCR as far as savers are concerned.

[minimoke]

Has anyone got any better idea how we can reduce our $300m weekly interest bill as well as increase our productivity to get
up the OECD ladder?
"[/FONT]
Thats a loaded question and there's clearly no easy answer. heres a few relatively quick fixes.
- Merge the three SOE electricity companies.
- quit poor performing govt entities such as TVNZ
- bulk purchase electricity from new electricity SOE and on sell to all govt beneficiaries.
- Issue debit cards to all benificiaries which allows spending on necessaries and allow accurate analysis of where tax payer funds are actually going. Cease all cash payments. The debit card gets topped up by visiting a winz office at a scheduled time.
- ensure x amount govt sponsored cash (eg ACC, kiwisaver, public service super) is reinvested / loaned back into NZ and not off shore
- sack any public servant that thinks spending tax payer cash on a beneficiary to get their swimming pool fixed is a good use of those funds.
- an immediate 10% drop in pay for all public servants (they have chosen to serve the public not gouge the tax payer)
- ban all powhiri and any other cultural / religious activity in all govt departments. Their time should be spent doing what they are being paid to do.
- Any pakeha in a government department caught wearing a greenstone tiki to be fined $50 for displaying poor dress sense.
- abandonment of the ETS
- front up to sick people and say we are not a wealthy country so don't expect really expensive drugs or treatment. Self indulgent fat people go to the back of the health queue. Whiel we are at it get rid of all teh health boards with the farcical govt appointed non elected chairs.

[Waiuta]

Possum and Minimoke make very good points. Taxing trusts as per Aussi is a non brainer and makes it fair for all. The merge view for the SOE's is excellent. And i've always thought we should be subsidising power to convert logs into chipboard as I'm sure we could add value there. We'd only be adding value to a primary product with another of our own resources. We do it with bauxite which is not even our resourse so, why not timber?

[POSSUM THE CAT]

Macduffy I am suggesting a level playing field get rid of all these Five years no deposit sales etc of appliances where the cost of all this is built into the prices. As for the building industry it might actually boom as it would encourage competition. Of the big so called competing building companies. If you track them all the way back to source = Fletchers so in my opinion they are all using similar pricing. And in My last lot of quick research I found Five (this was some years ago) but then the Four lots of extra management advertising & promotional budgets add to all the costs. Australlian bank deposit rates are far more above their OCR than here and the OCR is Higher to and the building industry is going well. Moved to Aus in 1998 and the cost of building a house in Queensland was about 40% cheaper than here Why? My Answer is far higher profit margins by basic monopolies that people do not know about.

[macduffy]

We've opened a can of worms here. I wasn't referring to the big building companies so much as to the ongoing viability of the numerous small firms who, I suspect, still build most of NZ's houses. As to the higher cost of building in NZ, this is largely, as you say, because of the comparative lack of competition within the building products sector, a natural consequence of a small market. Sounds like a sound reason to invest in FBU!

As for comparative costs of building a home in Queensland and NZ, I read recently that the "infrastructural" costs for a new section in Southern Queensland - by which I presume is meant roading, sewerage, power etc - was now in excess of AUD40,000 on average, far more than in other Aust capital cities. I don't know the equivalents in NZ cities but I'd be surprised if the 40% margin still applies.

Cheers

[POSSUM THE CAT]

Macduffy I was just comparing the cost of building the house not the land as that varies vastly depending on the area and the profit margin the developer wants

[CJ]

To get us back on topic, an interesting article by Gaynor:

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10702745

National seems to have a couple of hurdles on this one. Convince the public:

1. selling them is actually a good investment decision (see Hickeys article on Interest.co.nz)
2. that the mistakes of the 80's wont happen (see Gaynors article)

Edit: I thought this was a good article as well:

http://www.stuff.co.nz/business/4595769/Key-gambles-on-privatisation

[minimoke]

Thats a loaded question and there's clearly no easy answer. heres a few relatively quick fixes.
...
- ban all powhiri and any other cultural / religious activity in all govt departments. Their time should be spent doing what they are being paid to do.
.
OK -heres an illustrative point. Some dodgy maori (hes dodgy cos he's in court and maori because he says so) is being done for fraudulent wedding ceremonies.

First up Judge Jane Farish allowed a Maori blessing at the start of the proceedings. What has Maori mumbo jumbo (or any mumbo jumo for that matter) got to do with our justice system. The time take for the blessing is unproductive but the tax payer is paying for the judge, prosecution, court staff and other govt funded players in these proceedings to sit through something that does not lead to a verdict. If thats not bad enough she then spends tax payer time deliberating and decides the poor native shouldn't be treated too harshly because the sham of his conviction will carry through to his ancestors. His "ancestors" for petes sake. What a waste of space this judge is. Send her down the road to save a bit of the $300m

In case we missed it secondary schools started back this week. There around 350 schools and most if not all will have done a powhiri in a language 95% of the students would not understand. How many hours of lost education is this?

Once we get a handle on "productivity" we might then be able to start to work out how to save the $300m

[Arbitrage]

The Cullen fund (ie kiwi taxpayers) is buying assets in the form of dairy farms (some could be in Bill English's electorate?). The govt (ie kiwi taxpayers) is selling assets in the form of airlines and power companies.
Why is this? Surely the various transaction costs could be saved if the Cullen fund just bought the assets the govt was selling. My superannuation would feel safer with a power compay than with a dairy farm...

[CJ]

The Cullen fund (ie kiwi taxpayers) is buying assets in the form of dairy farms (some could be in Bill English's electorate?). The govt (ie kiwi taxpayers) is selling assets in the form of airlines and power companies.
Why is this? Surely the various transaction costs could be saved if the Cullen fund just bought the assets the govt was selling. My superannuation would feel safer with a power compay than with a dairy farm...I wouldn't be suprised if the CUllen fund did take a stake in any IPO but only say 10%. Howfully they will do that pre IPO so the Govt dont have to pay advisors fees on that.

[POSSUM THE CAT]

John Key says it is the high private debt that is NZ problem so what use is selling Govt owned assets to reduce Govt debt only to increase private debt as people borrow to pay for the govt assets.

[minimoke]

John Key says it is the high private debt that is NZ problem so what use is selling Govt owned assets to reduce Govt debt only to increase private debt as people borrow to pay for the govt assets.
This is where Mr Key is being particularly naughty. Our public debt is nothing like the PIGS - yet he is making us out like it is. What is dumb is selling off assets that have a very good return and spending the cash in non productive areas. Its been said that Solid Energy, for example have over inflated the asset value in their books and we will see spectacular returns from this SOE this year.

I'm not sure people will borrow to but the SOE - but its probably a good move. Remember what happened last time - we saw blue chips being sold off to raise cash for Capital Properties, Contact and AIA. No doubt the same will happen again and the cannny investor will be following those stocks down until their buy threshold is reached. There might be more to be made on the rebounding blue chips than on some of the SOE's. Either way its the brokers who win - and we know how productive they are.

[CJ]

What is dumb is selling off assets that have a very good return and spending the cash in non productive areas.

I'm not sure people will borrow to buy the SOE .They have to spend that cash in non productive areas anyway. The question is 'is it better to get the cash from SOE sales or debt?'

They may not borrow per-se but the money has to come from somewhere which is probably cash that would have gone into paying the mortgage if the IPO hadn't gone ahead.

[minimoke]

They have to spend that cash in non productive areas anyway. The question is 'is it better to get the cash from SOE sales or debt?'
Well thats a bit hard to answer until a decent look has been taken of the SOE's books. But on the face of it it doesn't seem to make sense to sell an asset that is generating more dividend income than the cost of debt. Sure you reduce your overall debt by applying SOE sale proceeds to it - but you are also loosing that dividend income stream. You also aren't dealing to the root of the problem - which is government spending more than it is earning - that is the issue that needs tackling. If not in 10 years time when the benefits have the SOE sales have gone the govt is in the same position but with no family silver left to hock off. If we think the govt income / expenditure streams are tough now - just wait 10 years when there are less workers and more superanuiants.

[POSSUM THE CAT]

If the return on anything is better than the interest on the loan needed to own it. Only an idiot would sell it.

[CJ]

If the return on anything is better than the interest on the loan needed to own it. Only an idiot would sell it.heard of risk return.

The other question with the SOE's is have the put the correct valuation on it. CEN has a dividend yeild of 4%. If one of the SOE's has a dividend yeild of 8%, on a very simplistic view (all other things being equal), isn't that asset undervalued - does that not mean is would actually trade on an exchange for twice as much (hands up if you will stag that IPO!!)

[POSSUM THE CAT]

CJ I Would hold it better than money in the bank And if the return that is bandied about is correct They would still be Idiots to sell it.

[minimoke]

Thats a loaded question and there's clearly no easy answer. heres a few relatively quick fixes.
- Merge the three SOE electricity companies.
- quit poor performing govt entities such as TVNZ

We always know (well at least it was my view) that Telecom was onto a looser flogging off Tivo through its retail stores. Now it seems TVNZ's investment in Hybrid TV may be kaput. If it was Sky and we had Labour in power we know the govt would step in and buy it so the beneficiaries up north had something constructive to do. With a National Govt I can't see quite the same desire - shame really , I'm quite attached to my Tivo.

[POSSUM THE CAT]

minimoke It would be good to sell under performing assets like TVNZ but they would probably have to pay someone to take it off their hands. And in private hands it might tell the truth that the present National Govt. is the worst performing Govt. in the last 60 years

[minimoke]

And in private hands it might tell the truth that the present National Govt. is the worst performing Govt. in the last 60 years
Thats a bit harsh isn't it? After all we got a cycle way to lead us out of the GFC

[CJ]

One thing I have been thinking about is the effect on the wider market should an SOE IPO. (Assume SOE valued at $4b and 25% listed)

Possible Effects:
- Prior to IPO, $1b needs to be accessed. This will come from selling existing shares causing index to fall?
- $1b in funds will be in escrow for at least a week while applications and oversubscriptions are worked out?
- New SOE will enter index so funds will need to buy but they will also need to sell the company falling out of the index?
- CEN and TPW will have another listed power co competitor so money will flow out of these and into SOE?

Any thoughts?

Disc: FNZ, CEN, TPW, IFL, ...

[minimoke]

One thing I have been thinking about is the effect on the wider market should an SOE IPO. (Assume SOE valued at $4b and 25% listed)

Possible Effects:
- Prior to IPO, $1b needs to be accessed. This will come from selling existing shares causing index to fall?
The sell off of blue chips happened last time around so that people could raise cash for the IPO. That meant there was good buying of other companies at discounted prices as well as stagging the IPO's. Cash will be king between now and an actual sell off.

[Waiuta]

Great article by Sir Paul Callaghan, New Zealander of the Year 'Technology offers route to prosperity'

http://www.stuff.co.nz/the-press/opinion/perspective/4628388/Technology-offers-route-to-prosperity

[POSSUM THE CAT]

Waiatu In other words courses like Maori Studies should be an optional extra & charged At $1,000,000.00 per course not exceeding Three Years and does not qualify for student loans And that should apply to all levels of education. Payable in advance of course.

[Waiuta]

You're probably right there Possum, I would have thought the world market for indidgenious paraphernalia et al would be somewhat limited and I'd be surprised if it could contribute greatly to our GPD.

[Waiuta]

Good article by Chalkie in The Press supporting NZ Super Fund's role in this proposed Crown Ownership release. Independent valuation's midpoint suggests a 49% value of $6.6B plus Air NZ at $360M gives a total around $7B. But Meridian (NP$184M), Genesis (NP$69M), Mighty River (NP$85M), Solid Energy (NP$68m) and Air NZ (NP$92M) have near enought to $500M in after tax profits.

It really comes down to what they get for these assets to make any appreciable difference.