Forum Archive Index - November 2001

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Sue,

>
> Any opinions?  
>

I've been doing a lot of reading over the weekend.  There is a lot of 
information in that white paperback that arrived on Friday!

One thing that is clear to me. Of all the energy companies about, 
Contact is one of the best.  

Before last winter, because overall New Zealand is expected to have a 
surplus of power until 2010, I would have said that being a net 
retailer, rather than a net generator, was best.  After all, if 
there is a surplus of power just wait until it gets cheap, and buy to 
make up the shortfall!  What wasn't clear was that one bad hydro 
year could completely wreck a net retailer, as 'Transalta'/'On 
Energy' found to its cost.  Long term, a power generator/retailer is  
going to struggle in this New Zealand market when there is a dry cold 
winter, unless you are a net generator.  Contact is the *only* listed 
net generator in this country.

On page 37 of the Grant Samuel Report, there is a table "Listed 
Energy Companies- Sharemarket Ratings".  This shows that the EME 
offer values Contact Energy at below the EBITDA multiples of  
Trustpower and NGC on today's market.  Surely Contact is a better bet 
than these two?   So why is the EME offer so low?  'Grant Samuel' 
argue that the share price of both NGC and Trustpower is too high. 
Surely this argument is churlish?  As I see it if you make a bid 
for a company on the market you should pay market price.  Not 
claim the market is too high, so you should pay a lower price!  
If you look down the same table there is a pathetic comparison given 
with EBITDA valuations of similar companies in the UK and USA.  The 
implication being that if Contact was in the USA or UK then it would 
be worth less, so EME should pay less.   Have you spotted the tiny 
flaw in this Grant Samuel argument?

Contact Energy is (gasp) a *New Zealand* company!   It isn't in the 
UK or USA!  Contact has the benefit of a very cheap supply of natural 
gas and hydro dam reserves.  So why on earth would you expect Contact 
to be priced the same way as some old world coal burner?  Contact and 
all the other New Zealand power companies should,  and do,  trade at 
a premium to all those US and UK power concerns.   Generating power 
is something that New Zealand does very well.  If EME want my 
Contact shares they are going to have to pay a *New Zealand* premium 
for them!  

I notice 'Grant Samuel' has valued Contact by using a discounted cash 
flow analysis.  Nothing wrong with that, except that the results can 
be very sensitive to the assumptions made, and some of those 
assumptions, I think, are dubious.  I'll run a few numbers on the 
focus investment board so you can see what I mean.  But to quote from 
the 'Grant Samuel' report on page 36:
"While they (industry rules) are only used as a cross check in most 
cases, industry rules of thumb can be the primary basis on which 
buyers determine prices in some industries.  In any event, it must be 
recognised that rules of thumb are usually relatively crude and prone 
to misinterpretation."

It looks like Contact shareholders owe a great debt to Bill Birch who 
struck such a favourable price deal for them in 1975.  Paying only 
$2.00-$3.80 per Gigajoule for Natural Gas, where companies 
equivalent companies in the UK and USA pay twice to three times that 
price is obviously hugely beneficial for Contact.  Will Contact 
continue to enjoy this benefit after the Maui gas field expires?  It 
is difficult to say, but 'Grant Samuel' thinks $4.50/GJ might be 
realistic.   Too optimistic?

I am slightly annoyed by there being almost no reference to per share 
earnings in the 'Grant Samuel' analysis.  Lest you have forgotten, 
Contact bought back 4.5% of its own shares last year.  This means the 
per share revenues figures for 2001 and future years are some 5% 
better than the bare 'total revenue' and 'net surplus after tax' 
figures indicate.

One last niggle.  EME does not have the finance package in place to 
complete the takeover.  'Grant Samuel' comments that this is very 
unusual.  'Grant Samuel' further states that the reason for the full 
takeover offer, rather than just a creeping 5% of shares per year 
takeover by stealth, which is allowed, is that EME wants to get their 
hands on Contact's cash flows.  The implication here is that EME 
wants to strip as much cash as they can from 'Contact' for their own 
ends.  Possibly, they may borrow against Contact's own assets to 
finance a heavily leverage takeover!  This sounds suspiciously like 
what a couple of cornerstone American shareholders did to Telecom NZ, 
leaving it desperately short of cash for any future growth.  A good 
move for the shareholders to be sure, but not very good for NZ.

So as you might gather, this ol' hound dog won't be rushing out to 
accept the current cash offer from EME, whatever bullying letters 
arrive in the mail in the next few weeks.   And the fact that I have 
taken the opposite view on my shares to what Independent directors 
Messers Phil Pryke and Co. intend to do with theirs, leads me to 
believe I have made the right decision ;-).

>
>Do you think EM will get 90%?  
>The Independent says a 10% bloc of institutional 
>investors plan to turn it down. 
>

That is very good news.  A 10% block will be enough to block the 
takeover.  And to that 10%, you can add Snoopy's small holding.

SNOOPY

(disclosure: hold CEN) 



---------------------------------
Message sent by Snoopy 
e-mail  tennyson@caverock.net.nz
on Pegasus Mail version 2.55
----------------------------------
"You can tell me I'm wrong twice, 
but that still only makes me wrong once."


----------------------------------------------------------------------------
To remove yourself from this list, please use the form at
http://www.sharechat.co.nz/chat/forum/