Window of opportunity opens on Powerco shares

The New Plymouth District Council is seeking indicative bids on its shareholding in energy distribution company Powerco, following news of merger discussions between Powerco and NGC.

The merger talks have created a window of opportunity for the council to maximise its Powerco investment by selling its shares now. The council would then re-invest the proceeds in a number of alternative investments, spreading risk while at least maintaining current income levels.

The council’s 38.12% Powerco shareholding, alongside the 11.79% holding of Taranaki Electricity Trust, which is also inviting bids, will put potential buyers in a position to control Powerco. In recent examples of such takeover positions, buyers have paid an average premium of around 25% on the market share price prior to the takeover announcement. The council’s expectation is greater than this due to the size and strategic nature of the Powerco business.

Recent examples suggest that if the council sold its shares after a merger took place, it could have to accept a discount of around 10% on market value.

Mayor Peter Tennent says the proposed merger is likely to be a success based on Powerco’s active history of growth through such deals. However, in order to achieve a position of influence in the new entity, the council would need to borrow heavily to purchase the additional shares necessary – and this is not regarded as a financially prudent option.

Mayor Tennent says: “Our investment in Powerco has been an unmitigated success and I have no doubt the company will continue to go from strength to strength. It is a fantastic company and if we lived in an ideal world we would stick with them and borrow to achieve a position of influence in the new entity.

“But borrowing that amount of money is just not an option. The landscape is changing and things are getting a bit too hot for us.

“So it’s time to move on, and the window of opportunity is open now. If we sell before the merger we stand to gain a good premium on top of the value of our holding. Selling after a merger could greatly reduce the chances of securing such a premium. In fact, we could well have to sell at a discount.

“If we simply retained our existing shareholding in the new entity, our current 38% would be drastically reduced, significantly limiting our influence over the dividend income that is so important to us in keeping a lid on rates.

“We have taken a great deal of expert advice on this subject and we believe our best option is to sell at a premium before the merger and re-invest in a range of investments.

“This will allow us to diversify our investments, taking our eggs out of a single basket and spreading them around. The net result is that we’ll have a larger, more diverse and less risky investment that yields at least the same income as at present.

“Rest assured that we wouldn’t contemplate going down this road if we envisaged it leading to an increase in rates due to a lower level of investment income.”

The council has instructed Pricewaterhouse Coopers to manage the sale process on its behalf and expects to consider indicative bids in early June. More information is available on the NPDC website at www.newplymouthnz.com.

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