Origin gets good deal in Contact takeover

By Lachlan Colquhoun in Sydney

Friday 30th July 2004

Last week's deal for Australia's Origin Energy to buy control of Contact Energy has created a genuine transtasman power giant but the company is hardly a household name even in its home market.

With a market value of over $A2 billion before the $A1.5 billion-plus Contact deal Origin has crept up on the Australian corporate landscape almost by stealth since it was spun off from energy and building materials conglomerate Boral in a February 2000 float.

Boral managed to aggregate a number of old-style public energy utilities under its umbrella, buying assets such as the Brisbane Gas Company, the Launceston Gas Company and the South Australian Gas company before bringing them all together under the name Boral Energy in 1995.

The distribution assets were floated off in 1997 in a company called Envestra, which is now in the orbit of Hong Kong billionaire Li Ka-shing and his Cheung Kong Infrastructure Group, but the rest of the company stayed with Boral until a second float in 2000.

Since then, Origin has grown by further acquisitions and is now Australia's second largest energy retailer.

Not only that, it has combined energy retailing with upstream exploration and production, generation and its own distribution.

The Contact Energy purchase which could cost up to $A2.5 billion if minority Contact shareholders like the Origin bid adds another dimension to Origin's strategy of pursuing a vertically integrated model, partly as a way of minimising risk but also as a way of gaining exposure all the way up the energy market value chain.

The deal with Contact not only is financially savvy with the $NZ5.67 offer price below Contact's recent trading price but delivers excellent geographical and operational synergies which could, if Origin managing director Grant King plays his cards right, see the company become a much more permanent fixture in Australasian energy markets than other companies, such as Edison Mission or NGC, which have been burnt by the recent volatility.

The likelihood of Origin gaining control of Contract for a cheap price, in a market where Statistics New Zealand has reported a 10.4% rise in energy prices for the year to June, makes it look like an even better buy. Contact is also a much higher margin business than Origin's Australian operations, making it more attractive again.

The new combination of Origin and Contact has a complementary blend of assets in the retail, generation and upstream areas of the energy business, and has assets spanning South Australia to New Zealand.

Even before the Contact deal, Origin became involved in gas exploration activity in New Zealand where it has invested in the Kupe Gas Project, which should produce gas by 2007, and Rockgas.

The result of this deal is that, for the first time, Australasia has a genuinely vertically integrated and geographically diverse power company.

Origin now has 2.1 million customers in both countries and a power generation capacity that has increased from only 883 megawatts to 3780MW.

Adding Origin and Contact will create a company with annual earnings before interest tax depreciation and amortisation (ebitda) of just under $A850 million and net profits of about $A270 million.

Origin has been one of the best performed stocks on the Australian Stock Exchange since its 2000 float, adding 30% to its listing price.

The shares hit a record high last week after the Contact deal was announced and analysts suggest there is room for further rises.

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