Vector sale figure a mystery and a myth

By Nick Stride

Friday 24th September 2004

Where the figure of "up to" $700 million came from will probably remain forever a mystery. What is certain is that it's a myth.

That's the amount Vector is allegedly aiming to raise from a sale of new equity that will put 24.9% of the company into private hands.

Five months ago this newspaper undertook a back-of
-the-fag-packet asset-based valuation, benchmarking Vector against Powerco.

Powerco was then trading on an enterprise value (EV) to optimised deprival value (ODV) ratio of 2.4 times.

That multiple appeared to have been inflated by a little irrational exuberance.

Applying a somewhat more conservative multiple of 2.0 times to Vector's ODV valued the lines company's equity at $2 billion, and so 25% at $500 million.

Doing the same exercise now, using an earnings-based multiple, EV to ebitda (earnings before interest, tax, depreciation, and amortisation), yields a not dissim ilar number.

Powerco's EV is $1.76 billion, 9.2 times last year's ebitda of $190 million.

Vector could arguably do a bit better than that, for two reasons.

Firstly, it is in a better regulatory position than Powerco, with a zero cpi-x rating. So, unlike Powerco, it has the ability to lift its profitability over the next few years by raising prices.

Secondly, its network is of bigger and better quality than Powerco's more of it is underground, for example.

So a listing multiple of 9.5 times doesn't seem unreasonable.

Say prospective ebitda (earnings before interest, tax, depreciation, and amortisation) is a little above last year's $341.1 million, at $350 million.

That gives an EV of $3.325 billion. Take off next year's debt of, say, $1.75 billion and the existing equity is worth $1.575 billion.

The new shares would be sold for cash, swelling the company's coffers. A sale of 24.9% would raise the value of Vector's equity to $2.097 billion, so the amount raised would be $522 million.

If Aucklanders keep seeing the $700 million figure it will be easy to convince them that the actual number, when it appears, represents the Vector trust "selling out cheap." That would suit some agendas very well.

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