The incentives the Government is dangling before prospective investors in Meridian Energy show just how much pressure its "Mixed Ownership Model" policy is under.

Some things sell on their merits alone. Icebreaker. BMW. Wooing Tree Pinot Noir. Sure, they may throw in the occasional discount or sweetener to clear inventory or get over a flat patch, but on the whole the purchaser is prepared to shell out top dollar based on confidence that she or he is getting quality in return.

Other products require the full range of marketing tricks to encourage customers to open their wallets and commit to the sale.

Cue all those late night infomercials, where you are shown a product and its alleged wondrous properties. Still not going to buy? Then you're told the low, low price! Still not interested? You don't have to pay for it all now, but can spread it over several instalments!! Want more? Well then, how about two-for-the-price-of-one!!! Won't bite? We'll throw in a set of steak knives as well!!!!

The Government's press release about the share offer for Meridian Energy has more than a whiff of this sort of Shelley "The Machine" Levene desperation about it. 

After all, here's what the Government claims to be selling:

Meridian is New Zealand’s largest electricity generator, using only renewable wind and water resources and producing over 30 per cent of the country’s electricity.  It has more than 270,000 connections to homes, farms and businesses, and a track record of strong and stable operating cashflows.

That sounds like a pretty good business to be a part of, doesn't it? It's a big, established player. People always want electricity. Clean and green is the way of the future. Should sell itself, right?

Well ... apparently not. Because the Government is reaching for the full bag of tricks (short of the free steak knives, that is) to try and drum up enthusiasm for its partial sell down of this jewel in our energy generating crown.

First of all, there's the "pay some now, the rest in 18 months" nature of the offer. All you need to do to share in the sweet, sweet honey of Meridian's dividends is put down $1 per share on October 29,

Then note what that "pay some now, the rest later" model does to your return on investment for that first year-and-a-half:

Paying in two instalments gives investors a higher dividend yield during the instalment period. Meridian is forecasting an implied gross instalment yield of 13.4 per cent over the first 12 months. This is based on Meridian’s underlying gross share dividend yield for New Zealand retail applicants of 8.4 per cent to 8.9 per cent for the same period, which is the level of return if an investor had paid for the shares in full.

In other words, buying under this model turbo charges your personal gain for the next year-and-a-half (out of dividends that previously would have gone to general Crown accounts).

But what happens at the end of that 18 month period, when you have to pay for the rest of your shares? Might not the value have dropped in the interim, so that you end up having to pay more for them than they are now worth on the market? After all, that's what investors in Mighty River Power have seen happen - those shares they happily snapped up at $2.50 are now worth $2.22 each (or, a 11.2% loss of value). 

Well, the Government is doing its utmost to guarantee that won't happen either. Because the extra top-up payment that "retail" (i.e. the sainted "Kiwi Mums and Dads" of political fairyland) investors will have to pay in April 2015 will be no more than $0.50-$0.60. But "institutional" investors - the big, bulk purchasers of shares who really drive the demand - will have to pay anywhere from $0.50-$0.80 more.

In other words, when you have to pay your extra in 18 months time, the people who will really want more of Meridian's shares are already going to be paying more for them than you have to, which almost certainly guarantees that their market price is going to be higher than the amount you've paid for your shares.

So it isn't an absolute guarantee that the shares held by retail owners won't lose value - because nothing is certain in this crooked vale of tears. But it's a risk that hardly appears to justify a 13.4% likely return - especially when (for instance) UDC Finance Ltd is offering just a 4.3% return for the same term of investment.

Why, then, is the Government being so generous to potential retail investors in Meridian?

Well, I think we all know the answer to that. For this sale process to be a "success", the Government doesn't have to raise as much money as it can from it. It needs to get some money, sure - but maximising the capital return is not the primary objective.

No, for the sale to succeed, the Government has to be able to say that the company has gone into the ownership of "ordinary Kiwis" ... thousands and thousands of ordinary Kiwis. 

But the problem is that, even though about 440,000 of these ordinary Kiwis had a think about buying the last power company the Government was trying to sell, only about one-in-four of them actually did so. At least some of whom were hardly your stereotypical "Mum and Dad investors". And, as noted above, those that did so have seen the value of their Mighty River Power investment drop by over 10% since then. 

So the Government has to face up to the horrible question: what if we try to sell Meridian, and no-one wants to buy it? Or, rather, no ordinary Kiwis, to whom we have to sell it to if we are to avoid appearing to hawk off the country's silver to big business and rich foreigners, wants to buy it?

Hence - every possible incentive dangled before the eyes of individuals who may have been feeling burnt by the Government's last "too good to miss!" offer. All paid for, of course, with the money of those New Zealanders who can't pull together the few thousand dollars necessary to buy a ticket aboard this particular gravy train. 

Comments (9)

by Matthew Percival on September 20, 2013
Matthew Percival

I think there is some truth to what you're saying but there are also a couple of points to be made.

The offer was always going to be in two tranches due to the sheer size of the company being listed. Meridian is a massive company by NZ standards. Selling it in two tranches maximises the return to the government as opposed to selling it in one.

You also make no mention of the Labour/Greens NZ Power policy (I presume this policy hasn't changed since Cunliffe took leadership). I believe that policy is the single largest cause for the loss in value in MRP and is why the government has to sell Meridian at the lower end of the scale. It's a bit rich for the opposition to critise the government for selling at the lower end of the scale when it is their policy driving the price down but no doubt that wont stop them!  

I can't believe your suggestion in the last paragraph that the taxpayers of New Zealand got burned by the MRP offer. The people who have been burned were the investors! The investors are the people who paid $1.7 billion for a $1.5 billion company. The taxpayers of New Zealand are firmly on the right side of the ledger at the moment!

by Andrew Geddis on September 20, 2013
Andrew Geddis

The offer was always going to be in two tranches due to the sheer size of the company being listed

Sure - it's the biggest IPO NZ has seen. It also is the biggest IPO NZ has seen, being launched a matter of months after another IPO of a very similar company. So one may ask whether this is the optimal time to be doing this ... and whether that fact is playing a big part in how it is being done.

You also make no mention of the Labour/Greens NZ Power policy (I presume this policy hasn't changed since Cunliffe took leadership). I believe that policy is the single largest cause for the loss in value in MRP and is why the government has to sell Meridian at the lower end of the scale.

But this policy was announced prior to the setting of the MRP offer price (which, in turn, was part-determined by demand for MRP shares). So whilst you certainly can argue that the original $2.50 offer price was lower than it would have been absent the Labour-Green policy announcement - a fact some purchasers were actually positively gleeful about - it is harder to say the further 11% decline in price was caused by it. 

I can't believe your suggestion in the last paragraph that the taxpayers of New Zealand got burned by the MRP offer.

That's not what I'm suggesting at all. I'm suggesting that because the investors in MRP will be feeling burned by their experience, there will be a reluctance on their part (as well as others who have seen what happened to them) to repeat the experience. And so, in order to overcome that reluctance, the Government is sweetening the deal quite considerably. But every sweetener comes at a cost ... and that cost is bourne by everyone who doesn't buy into the company.

And that is all.

by william blake on September 20, 2013
william blake

Here is an idea. Since the part asset sales seem to be ideologically driven. Why not just give the shares away, for nothing. This shouldn't be too much of a drama as I think we already own the companies. Then if we want to take dividends from our investment we will have to increase the cost of power at a shareholder meeting.

by stuart munro on September 21, 2013
stuart munro

@ Matthew - firstly, the interested group are citizens, not taxpayers - every five year old owned part of those assets until those unspeakable scoundrels Key and English stole them from them.

And in the long term, hydro assets are worth more. As prices rise subsequent to privatisation, the value of the asset will go up proportionately. Oil scarcity will affect it too. Thirty years from now the public will be able to do the math and see how badly they were ripped off - even if irresponsible CEOs never pay 'Mom and Pop" investors a cent and merely drink themselves to death on foreign plonk.

by Lee Churchman on September 21, 2013
Lee Churchman

You have to marvel at how after this the National Party will retain a reputation for "solid economic management" and "good business thinking" in the news media and among the wider public. I can't think of anyone with a decent business brain who would sell MRP at this time and at such a low price. 

This is a truly horrible government.


by Henry Barnard on September 21, 2013
Henry Barnard

John "Robbing Hood" Key and his merrymen are stealing from the good ordinary folk of New Zealand to line the coffers of the rich.  I am completely bemused by why they are getting away with it.

by Alex Coleman on September 21, 2013
Alex Coleman

The Government could easily enough counter the risk of the NZ Power policy by just holding off on the sale until after the election.


But aside form that, the MOM policy is a dog. We are going to end up with these giants of the NZX, with majority govt ownership and an implied government backing. The money invested in them by other shareholders, is not being invested in other things. Instead it is being spent on normal government operations. I'm surprsied that we haven't seen the idea called out by the likes of the BRT, it runs counter to everything they've been telling us for decaeds.

If the MOM policy is, as Key claims, better than full privatisation or the SOE model, then why not apply it to FCL or Telecom?



by Gilbert on September 21, 2013

Great analysis Andrew. Presumably the boffins in treasury think this is a really great sheme too?

by Brett Shand on September 25, 2013
Brett Shand

One aspect that has not been mentioned is that perhaps, the goverment is really selling risk. I wonder how many Kiwis will be generating some, most or all of their own power in, say, ten years. As has been said 'Never give a sucker and even break.'

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