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Meridian entry price massaged to be $1 a share

Friday 20th September 2013

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Almost one million extra Meridian shares have been issued to bring the entry price for participation down to $1 a share in the first instalment of the government's second partial privatisation.

Offer documents released today show the dilutionary effect of issuing nearly 963 million additional shares is calculated so that would-be investors understand they are being asked to put $1 down to play in the first instance, with a second payment due in 18 months' time of no more than 60 cents.

The move is one of several ways the government and its financial advisers are trying to entice small investors back to its share float programme after the relative flop of the MightyRiverPower float in May.

MRP shares have traded below their listing price of $2.50 since just after floating in May, changing hands today at $2.23. Finance Minister Bill English said at today's Meridian float launch there was "something of a market view that the MRP float was overpriced".

Accordingly, the Meridian float is pitched at an issue price range of $1.50 to $1.80 a share, which is calculated to be demonstrably below the MRP float price.

On top of that, retail investors won't have to pay more than $1.60 all up, being the cap placed on the issue price for non-institutional, New Zealand-resident shareholders, as they long as they buy their shares in the initial float on Oct. 29 and hold onto them until May 4, 2015.

During that 18 month period, Meridian's tradeable securities will be instalment receipts, converting to ordinary shares and reflecting the full share price only after the second instalments are paid.

Shareholders who buy instalment receipts on-market after the initial float will face a second instalment price equivalent to the share price prevailing at the time minus the original $1 payment.

The instalment payment system also delivers a fillip to institutional investors, who are included in the scheme, with financial advisers arguing this ensured simplicity and avoided two markets for Meridian securities - instalment receipts and fully paid shares - early in its life as a stock exchange listed company.

The instalment receipt system gives all shareholders who participate in the float an artificially high 13.4 percent rate of return in the first 12 months. That's because while investors may only have paid $1 up-front, dividends from Meridian will be calculated as if the full share price had been paid.

That allows the float to be marketed as producing a 13.4 percent "implied gross instalment" yield, instead of the yields of 8.4 percent and 9.2 percent forecast in the prospectus for the 2014 and 2015 financial years respectively.

The offer documents issued today show almost 963 million new shares were issued in Meridian ahead of the offer to sell 49 percent of Meridian to the public.

The practice is uncontroversial in that it has no impact on the total enterprise value of the company, which the prospectus issued today puts at between $4.965 billion and $5.734 billion, based on the $1.50 to $1.80 share issue price range.

That shows Meridian is now worth between $800 million and $1.5 billion less than the last independent valuation of Meridian published on the Treasury website, less than two years ago, which put Meridian's enterprise value at $6.5 billion.

English said the difference in value reflected the loss of a premium for control, since the government would remain the controlling shareholder, reduced earnings after Meridian lowered its electricity price to the Tiwai Point aluminium smelter, low demand growth for electricity, and the regulatory threat of the Labour-Greens' single buyer electricity policy on power company returns, if implemented.

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