Powerco holding value

Tuesday 13th October 2009

New Plymouth-based gas and electricity network owner Powerco is holding its value at $1.9 billion to $2 billion, according to the Grant Samuel report on the Babcock and Brown Infrastructure bailout package.

While valuations are similar on both an earnings multiple analysis and discounted cash flow basis, Grant Samuel prefers EMA because of the high regulatory risk and comparatively capital-intensive nature of Powerco's business.

"The financial model assumes a neutral regulatory environment," the independent expert report from Grant Samuel says.

"There is considerable uncertainty associated with the future regulatory environment that could have a significant negative impact on Powerco's electricity and gas distribution businesses.

"The development of the regulatory environment is insufficiently advanced to allow the possible outcomes to be modelled with any certainty."

The report cites no comparable transactions other than the 2004 BBI acquisition of Powerco and its sale of a 58% stake in Powerco to the Queensland Investment Corporation in February this year. It concludes that infrastructure transactions in New Zealand are taking place at a premium to trading multipes, ie., at nine times forecast EBITDA compared to trading multiples of 7.8 times (for Vector).

"These multiples are generally lower than the implied multiples for the valuation of BBI's Australian gas transmissions and distribution businesses."

Grant Samuel said this reflected the fact that 90% of the Powerco business is electricity distribution, which is more capital-intensive than gas distribution; the short and medium term growth impacts from the New Zealand recession; and regulatory uncertainty.

The independent expert report recommends the BBI capital restructuring as fair and reasonable, especially given the likelihood of insolvency if the transactions do not go ahead.

Businesswire.co.nz

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