Origin agrees to sell Contact stake for $1.8B, ending era of foreign control

Tuesday 4th August 2015

Contact Energy will become an independently governed company for the first time since privatisation in 1999 after cornerstone shareholder Origin Energy agreed to sell its 53.1 percent stake to "a broad range of Australian, New Zealand and international equity market" investors.

The sale will be concluded over the next day at a fixed price of $4.65 a share to realise $1.8 billion. The shares closed yesterday at $5.02. The move will shore up Origin's balance sheet and preserve investment grade credit ratings for the company, which is under pressure because of cost over-runs and slumping gas prices affecting its A$25 billion liquefied natural gas project in Queensland. Origin will retain its upstream interests, primarily a 50 percent interest in the Kupe offshore Taranaki oil and gas field.

The transactions end Contact's 16 years under the effective control of a foreign owned majority shareholder following the original sale of a 40 percent shareholding to Edison Mission Energy of California in 1999, in the first partial privatisation of a state owned electricity company. Contact will also seek a dual-listing on the Australian Stock Exchange, which it abandoned in the mid-2000s.

Origin bought EME's stake, which had risen to 50 percent, in 2003 and made an abortive attempt to merge the two companies in 2006 - a move fiercely resisted by New Zealand shareholders who saw it as a takeover by stealth. EME also attempted a full takeover in 2001, which also failed.

The company's controversial deputy chair, Phil Pryke, will resume interim chairmanship of the company he has been involved with since corporatisation in the mid-1990s. Pryke was chair under EME but was replaced by Origin managing director Grant King in 2003. Former Origin appointed director Bruce Beeren will remain on the Contact board, along with New Zealand based independent directors Sue Sheldon and Whaimutu Dewes.

The move sees King, one of his long-serving lieutenants Karen Moses and Contact's chief executive of the mid-2000s, David Baldwin, leave the Contact board.

The current chief executive, Dennis Barnes, an Origin secondment, will stay on as a permanent employee of Contact, the company said in a statement issued to the NZX this morning.

Contact shares were placed in a trading halt this morning while the sale is undertaken, with the expectation it will be completed by tomorrow.

The company also issued earnings guidance, saying it expects earnings before interest, tax, depreciation, interest, amortisation and movements in the value of financial instruments to be approximately $525 million and underlying earnings after tax to come in at around $161 million for the year to June 30. Its profit results will be released on Aug. 17. It will also raise its distribution policy to target dividends at 100 percent of underlying earnings rather than 80 percent at present, and will make additional distributions in the event that free cash flows exceed ordinary dividends.

Origin took out a large lump of capital prior to today's announcement, with the payment of a special dividend of 50 cents per share in late June after the Origin-dominated board decided against Contact pursuing international geothermal energy developments with cash it expects to stack up over coming years as weak electricity demand growth ends any medium term pressure to invest in new electricity generation capacity.

The ASX dual-listing is expected to be completed within four to six weeks and a search for new directors is under way, with formal elections scheduled at the annual meeting later this year.

In a statement to the ASX, King said the move was "consistent with Origin's stated intention to continue to take action to reduce operating and capital costs, realign debt across group entities and, where appropriate, divest assets. The proceeds from the sale will provide increased financial flexibility in the short to medium term."

Origin expects credit rating agency Moody's Investors Service to lower its credit rating from Baa2 with a negative outlook to a Baa3 rating with a "stable" outlook, "reflecting their view of a reduction in earnings diversity," said King. Origin's rating from Standard & Poor's will remain unchanged at BBB-minus (stable).

BusinessDesk.co.nz

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