Research by the Greens into just who bought the Mighty River Power shares show that those Mum and Dad investors were more like 'Mummy and Daddy dahling' investors

It's no secret that I'm no fan of National's partial asset-sales programme. To me it's always seemed like selling the rental property to pay to renovate the spare room. Why would you give away the long-term returns for the sake of a quick buck to spruce up a few schools, hospital and roads? Having said that, it's not the nuttiest of ideas, either.

What would have been really nutty is to follow the Douglas-Richardson-Brash prescription and sell the whole lot; a 49 percent sale dilutes some of my ideological outrage, just as National intended. I believe power supply is core to New Zealand Inc and the New Zealand that isn't incorporated but simply ensures its citizens have what they need for a full and rewarding life. A warm home, an oven, a bit of telly and internet are all part of that and require electricity. So government ownership is right and proper, especially when the power suppliers can still be run along commercially sound lines.

But National's partial sell-off nipped that gut argument in the bud; we still owned the majority and the people still had control. Good. Opponents were limited to arguing about loss of revenue and the fact ownership by all would become ownership by fewer.

Having cut off some of the ideological rage, National came up with a range of arguments to justify its plans. But for me the only two with any real merit were 1) that the money earned from sale would mean less borrowing and debt and 2) people with money to invest might turn to the share market rather than the investment property market.

Less debt and more investment in the productive sectors are a lot like mom and apple pie – hard to oppose. Heck, even Labour is saying it would have moved heaven and earth to reach a surplus next year and even the Greens shake their fist at second home buyers.

But of course it's not as simple as that. I've always thought National and Labour were wrong to be so obsessed with an urgent return to surplus. Just as interest rates for mortgages are at their lowest levels since Adam sucked his thumb, so are borrowing rates for countries. If those schools and hospitals need work – and in Christchurch they obviously do – then the good news is that the need to rebuild our second largest city comes at a time when cheap money is available and we don't need to sell assets to fund the work.

So while you can make a case for justification #1, I think it's fundamentally tosh.

So what about justification #2? Well, at first blush National's report that 113,000 retail investors had bought shares in Mighty River Power seemed like some sort of vindication, especially when it was reported that 77,000 of those were first-time investors.

But the Greens today seem to have done for that second justification as well. A press release this morning in Russel Norman's name gives us more details about those 113,000 investors and the shares they bought.

As National had reported, those 113,000 investors bought 26.9 percent of the company.

But those shares weren't spread evenly amongst those buyers – half of them were bought by just 13,000 of those investors. They bought, on average, $35,000 worth of shares each. Straight away, that tells you these are people with considerable wealth.

But burrow down deeper and the Greens say a select group of fewer than 400 individuals, trusts, and organisations bought 10 percent of the retail shares with an average investment of nearly quarter of a million dollars each.

So while 113,000 buying 26.9 percent – 77,000 of them new investors – sounds like some sort of success, 400 people buying 10 percent sounds like a win for the old school tie.

Justification #2 – sunk. Says Norman:

“The truth is that 98 percent of New Zealanders bought no shares at all. Half the retail shares went to just 0.3 percent of the population, and a tiny group of just 400 wealthy individuals and organisations got 10 percent of the retail shares.

“National’s asset sales have been a failure in its own terms. The hundreds of thousands of eager buyers that Mr Key promised didn’t show up, so he sold the shares to a small number of wealthy people instead. The shares are not widely held; they are overwhelmingly concentrated in the hands of a few".

Rather than mum and dad investors being at the front of the queue, it seems more like 'Mummy and Daddy dahling' investors grabbing more than their fair share of a core New Zealand asset. A company that serves the needs of us all is now under pressure to deliver returns to a select few.

That second justification offered by Bill English, John Key and Tony Ryall that partial sales would create a new era of citizen capitalism has been sadly, yet predictably, undermined.

So we're left with no good reason for the Mighty River sale and certainly no reason for another sale to take place.

The capital market experts preaching the value of the sale are looking more and more like ideological cheerleaders rather than considered analysts and the political wrangling between left and right is raising serious questions about the value of any further floats.

Some might say the stagnant share price of Mighty River Power is also an argument against, but I think it's nonsense to pass judgment on the true value of a stock when it's only been trading for a few weeks. It's far too early to say whether it was a good buy or not.

But what's increasingly clear is that, ideology aside, Mighty River Power was not a good sale and, while National is clearly committed to the Meridian sale, it must find a way to stop there and quell its desire to keep selling.

Comments (14)

by Jacob Toner on May 24, 2013
Jacob Toner

Is the argument really sunk when there are 77,000 new investors in the sharemarket regardless of the overall percentage of the company they own? This is just the first partial sell down and with more to come we can reasonably expect more "first timers" will take the plunge. This step, along with the launch of KiwiSaver, is huge for encouraging diversification of New Zealander's investments and especially showing a viable alternative to property investing.

by Tim Watkin on May 24, 2013
Tim Watkin

It's a fair question Jacob and I agree that more share investors is a good thing as far as it goes. But let me be annoying and answer your question with another. If most of them bought only the $2000 basic package, does that really represent a significant move into the market? The couple of people I know who bought aren't now looking for other shares or have any clearer idea about the strenghts and weaknesses of the NZX. The $2000 spent hasn't made any difference to their ownership, or otherwise, of property either.

If anything, it's those few who spent $35,000+ who may not be buying another rental as a result. But if this massive sale means a few dozen fewer houses bought as rentals, does that really amount to a seachange and is it worth the loss of 49% of such an asset?

And is the move by even 77,000 people to buy, say, $154m worth (at $2000 each) of a $3.8 billion company worth the loss? And worth the fact that a few months ago 10 percent of MRP was owned by over 400,000 New Zealanders, and is now owned by 400? What a massive transfer of wealth.

I think the gain very small and the price paid very high.

 

by stuart munro on May 24, 2013
stuart munro

Mom and apple pie is an invidious Americanism. Mum's the word.

This theft of state property is fenced to US buyers, which explains the use of their memes. Not in the national interest, lacks a mandate, economically unsound. Sounds like the Gnat motto.

May it be their epitaph.

by BeShakey on May 24, 2013
BeShakey

What a massive transfer of wealth.

Not necessarily - they paid for the shares, so there was a transfer of wealth in both directions. If you're right that it's too early to determine if the share price was right then it's too early to tell if the transfer of wealth was to or from the government.

Regardless of that, if the 13,000 who bought an average of $35,000 each hold on to their shares, the government will pay them $18.2million in bonus shares (assuming the share price stays at its listing price of $2.50 - obviously the buyers will be hoping it goes substantially higher). The 400 who bought 10% of the company will get themselves a cool $15.2million. To give an idea of the scale of those costs, in its submission to the government's green paper on vulnerable children KidsCan estimated that extending their foods in school programme to all decile 1 to 4 primaries and intermediates would cost $3.3million per annum.

(Note that all the numbers I used are rough calculations based on the figures in your article. They're almost certainly not perfect, but whatever the precise figure, the point remains that in two years the government will be paying out a lot of money to a lot of people who are already pretty rich).

by Matthew Percival on May 24, 2013
Matthew Percival

It's been a big week for pundit.co.nz with Dame Anne Salmond dropping in and Andrew Geddis writing in the Herald (arguably a massive upgrade for that publication) but to end the week with this? I guess I should be glad it's not blog #5 on constitutional issues!

It is rich for the Green Party to come out with these numbers as it's power policy was the reason many Mum & Dad investors didn't directly invest after pre-registering. It also hides the fact that many Mum & Dad investors (and others) did invest via managed funds, kiwisaver funds and superannuation funds.

I believe it is also incorrect to suggest that New Zealanders owned 100% of MRP prior to float. If that was the case we are owed a lot of dividends! If we did own the 49% which was floated we would have received dividends like Aucklanders do every year via AECT. The people of New Zealand never owned it, the crown owned it. Either that or our Dividends have been confiscated for years!

As Beshakey eludes to the purchasing of shares is a transfer of risk. We may very well look back in 5 years and consider this to be a very good deal for the crown. $1.7 billion dollars in for an asset worth less than that figure. I don't think it's the worst time to be getting out of the energy market. Renewables will over time become more technologically efficient. It would not surprise me one bit to see energy producing solar panel roofing in my lifetime. What will we do with the hydro energy then?

It's also important to note the valuation methodology for a mature company like MRP will be heavily weighted towards a discounted future cash flow model. So the $1.7 billion received represents the present value of future dividend cash flows. It would seem at this early stage to be a fair price although as you say it's still early days. 

Whether directly from the float of MRP or not it's looking to be a big year for the sharemarket in terms of floats for exciting new companies. The most recent capital raising being that of Snakk Media which was oversubscribed by 15%. What other political party has a policy which encourages investors to put their money into shares rather than simply taking the approach of punishing property investors via taxes? You would have to concede at the very least the MRP share float has piqued interest in the sharemarket.

It's all very well taking on debt at record low interest rates but you need to be able to ensure you can still repay the debt when interest rates rise (as they will). It also makes limited sense when your country as a whole has an already overwhelming exposure to foreign debt.

by Kyle Matthews on May 24, 2013
Kyle Matthews

Of that 400, we really need to know how many are people, and how many are organisations. If 20 of them are kiwisaver type outfits, then actually tens of thousands of us have brought into MRP.

Without splitting that out, the information the Greens have put out seems incomplete to draw any conclusions.

by BeShakey on May 24, 2013
BeShakey

The KiwiSaver website lists 30 providers the provide KiwiSaver to the public. Assuming they all bought shares, the remaining 370 probably aren't all individuals (and may be organisations the public is more comfortable about owning a large portion of shares - like ACC). Regardless, it looks like there aren't many mom and pop investors in there.

by Tim Watkin on May 27, 2013
Tim Watkin

Matthew, I think it's a reach to argue that because we didn't get dividends, we didn't own MRP. I don't get a share of DoC's profits either, but the national parks are ours as New Zealanders. 

Sure, the value of these companies may fall and rise. So what? Are you saying this is the top of the market for power companies, ever? If all state assets are simply assets to be sold at the top of a cycle, when's the best time to sell the national parks? My point is that this isn't just an economic equation.

Not sure where you're going with the renewables argument; power companies world over are investing in and profiting from them, these included.

And a question re your point about the sharemarket - if it's generating its own IPOs, why does it need the 'corporate welfare' of MRP's listing? Given the other listings, maybe the interest is already there rather than MRP piquing it?

by Ross on May 27, 2013
Ross

As I've stated here previously, some genuine "mum and dad" investors were not even permitted to get their full allotment of 2000 shares and had to settle for less. John Key intimated, prior to the shares going on the market, that any mum and dad investor would get the shares that they asked for. That turned out to be false. Of course it needn't have been that way. All mum and dad investors could have been given what they requested.

by Ross on May 27, 2013
Ross

It is rich for the Green Party to come out with these numbers as it's power policy was the reason many Mum & Dad investors didn't directly invest after pre-registering.

Have you got any proof to back up that statement which on the face of it seems a little rhetorical? I suspect that many of those who pre-registered had no intention of investing, or declined to take up the offer when delved into the pros and cons of their investment.The share prospectus made mention of the risks involved with the sale. Moreover Geoff Bertram and Rod Oram made it very clear that there could be issues with the share float. How you could ignore their reasoned comments and blame the lacklustre share float on Labour and the Greens is totally beyond me.

http://www.stuff.co.nz/dominion-post/comment/8607601/Tighter-rein-urged-on-asset-revaluations

http://www.stuff.co.nz/the-press/opinion/columnists/8577703/Tight-lips-over-Mighty-River-Power-analysis

 

by Matthew Percival on May 27, 2013
Matthew Percival

@Ross we have already dealt with the share allotment in another thread.

The evidence the Green/Labour statement made a difference can be found when comparing the take up of the MRP float vs the Contact Energy float. I don't have the numbers in front of me but from memory the Contact float had around 330,000 pre-registration and around 200,000 people bought shares. Approximately 60% take up.

The MRP float had circa 400,000 pre-registrations and 113,000 bought shares. Around a 28% take-up. Of course there was always the threat of regulation, that applies to both floats. But that threat only because reality in the MRP float, hence the massive drop-off in pre-registrations to purchasers.

@Tim as far as I'm aware (happy to be corrected) DOC's profits get re-invested, it doesn't pay a dividend to the government so a slightly different situation.

What I'm saying is that the partial float is a transfer of risk from the crown to the new shareholders. The crown has received a fair value for those shares given the information we have today. Future events may or may not work out well for the shareholders - that's the nature of owning shares. There are no guarantees, the new shareholders may make a loss on MRP shares. As of this moment with the shares at $2.47 it's going well for the crown!

Sure, there is a strategic aspect to this it's not just economic which is why the crown has retained majority ownership.

It will always be a moot point if the MRP share offer has piqued interest in the market as we are dealing with hypotheticals. However I think we can agree it certainly hasn't hurt the market in this regard.

by Ross on May 27, 2013
Ross

@Ross we have already dealt with the share allotment in another thread.

The evidence the Green/Labour statement made a difference can be found when comparing the take up of the MRP float vs the Contact Energy float. I don't have the numbers in front of me but from memory the Contact float had around 330,000 pre-registration and around 200,000 people bought shares. Approximately 60% take up.

True, we did discuss the allotment in another thread. But it doesn't alter the fact  that some "mum and dad" investors missed out on shares.

Did the Contact float have expert commentary surrounding the risk of investment in the days leading up to the float?

Ultimately, it seems you don't like the Labour and Greens policy. That has possibly clouded your perception of why the share float wasn't a rip-roaring success as promised by the PM.

by Ross on May 27, 2013
Ross

One commentator thinks it would be suicidal to sell Meridian, and thinks an early election is possible.

http://www.interest.co.nz/opinion/64643/opinion-headache-government-mighty-river-shares-dropping-well-below-their-nz250-issue-

by Robert Boyd-Bell on May 30, 2013
Robert Boyd-Bell

Fascinating to note that MRP directors appointed by the National Government have now used their inflated salaries to purchase MRP shares on the depressed market - just more mums and dads!

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