Market News 16 September 2024

Johnny Lee writes:

Contact Energy is proposing to buy Manawa Energy.

The offer, expected to conclude in the first half of 2025, is for the entirety of Manawa and will see Manawa delist from our exchange.

Manawa, formerly known as Trustpower, is majority controlled by Infratil and TECT – the Tauranga Energy Consumer Trust. Both entities have already committed their aggregated 78% shareholding to accept the scheme of arrangement.

The acquisition will be settled by a combination of shares and cash. Manawa shareholders will receive $1.16 per share, plus 0.5719 Contact shares per Manawa share held. With Contact trading at around $8.15 per share, this equates to a value of around $5.80 a share. This dollar amount does include a large asterisk, however.

This figure will fluctuate. Not only will Contact Energy’s share price change, but both the cash component will change – based on any dividends Manawa pays – and the Contact Energy ratio will change – based on any dividends Contact pays.

If the deal does indeed conclude in the middle of next year, this will include the normal dividend payout month of both companies. In Manawa’s case, it may include two payments.

The transaction is subject to a number of approvals, and these are not a forgone conclusion. Electricity prices are a sensitive issue at the moment, and the New Zealand Commerce Commission would need to be convinced that such a merger of assets would not result in Contact having undue power in the electricity generation sector. Manawa sold its retail customer facing unit in 2022 to Mercury after similar scrutiny from the NZCC.

The announcement of this proposed takeover has several implications to consider for investors.

For Manawa shareholders, the current pricing represents a two-year high, and the offer includes shares in a larger company.

This offer may represent a good opportunity to exit for its two largest shareholders. While Manawa has always had reasonable liquidity, 10% of Contact Energy is significantly easier to trade than 51% of Manawa.

Ironically, four years ago, Infratil was approached by AustralianSuper with an indicative offer to buy the company for $4.69 per share. However, the one asset AustralianSuper did not include in the proposal was Manawa, instead offering an in-specie distribution to Infratil shareholders. Obviously, this did not come to pass, and Infratil now trades above $12 a share.

For Manawa bondholders, this transaction will very much depend on the terms of the deal, and one’s view on interest rates. All bondholders – Manawa’s listed bonds are MNW170 (2029), MNW180 (2026) and MNW190 (2027) - will be repaid immediately by Contact once the deal concludes next year.

The Scheme Arrangement Booklet, expected to be sent to shareholders in early 2025, will include details around this repayment. Presumably, the bonds will be repaid at the higher of par or the prevailing market price. The three listed bonds total about $375,000,000 of outstanding value, if price at par. Contact has stated it intends to fund this from existing facilities.

Combined with the $363 million in cash value, this would represent about $740 million returned to investors across the two asset classes. The balance, perhaps around $1.5 billion, would be issued in Contact shares or repaid to Manawa’s bankers.

For Contact shareholders, the transaction represents an opportunity to diversify its assets immediately and into the future. Manawa’s pipeline of potential assets gives Contact additional options, and also gives the Contact a more diverse generation profile, with Manawa’s assets being located in different areas. 

The number of Contact shares on issue will increase, which does have a dilutionary impact. Some control will also be ceded, with Manawa shareholders (mostly Infratil and TECT) taking an 18% stake in Contact once allotted. 

Contact’s leadership has not been shy about disclosing its view that the offer is great value for Contact shareholders. Manawa shareholders will have read these opinions. Whether they inspire a second bidder to emerge remains to be seen. 

For Infratil shareholders, the transaction represents about $300 million in value that has been added immediately courtesy of the increased Manawa share price. However, the question will be what Infratil intends to do longer term. The transaction will leave Infratil owning about 10% of Contact Energy.

Infratil’s announcement stated that the company was looking forward to the potential for higher dividends and increased flexibility across its portfolio. However, Infratil is not typically in the business of owning small minority stakes in companies. As this offer progresses, Infratil will likely put forward its case for either holding Contact long-term, or moving on to another opportunity.

For those observing from the sidelines, the announcement would represent yet another departure from our exchange. Barring a regulatory intervention, Manawa will find itself added to the long list of companies that have left our exchange.

The possibility of such regulatory interference is always a risk. While Manawa no longer holds its retail customer facing unit, Contact will face questions around its market power in the generation market. Manawa is not a major electricity generator when compared to the likes of Meridian and Contact. However, much of our generation is already tied up to the top four generators: Meridian, Contact, Genesis and Mercury.

One could argue that Manawa’s pipeline of development for new generation would be accelerated by Contact’s financial grunt. The same person could also argue that by removing duplications in back-office functions, Contact and Manawa would be more efficient as a combined entity.

The delisting of Manawa – which is absolutely not a forgone conclusion - would usher in a new company to join the NZX50. The most recent change to the indices occurred in December 2023, when Gentrack and Turner Automotive entered the index and Pacific Edge and Synlait were removed. The next change, most likely, will be the removal of Arvida later this year.

The next steps for Manawa shareholders will include the Independent Adviser’s Report, which should provide shareholders some guidance on the update to date value of Manawa’s assets. 

The takeover approach for Manawa by Contact would represent one of the largest takeovers between listed companies in NZX history. A number of hurdles remain, and judging by the share price – up 35%, but currently at a steep discount to the implied value of the takeover – there remains much to prove before this offer concludes.

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Briscoes has updated the market with its half year results.

While net profit fell 22%, much of this was attributed to adjust for the recent tax changes. Excluding these one-off items, Briscoes reported a 5% decrease in net profit.

A dividend of 12.5 cents per share was declared, which represents no change from last year.

While revenue did climb, the increased pressure on margins led to the headline result. Passing on cost increases is becoming more difficult, as consumers continue to find their wallets stretched.

Briscoes investment into KMD Brands (formerly Kathmandu) dragged the result down further. Kathmandu shares are down 30% this year and have not paid a dividend so far this year.

Briscoes remains significantly cash rich, with $130 million sitting in the bank, but did warn shareholders that its new automated distribution centre would demand at least $100 million over the three-year period. 

While Briscoes cautioned that trading conditions are worsening, hope remains that lower cash rates will return some optimism to consumers. A number of sectors are expressing similar sentiments.

Overall, Briscoes is profitable, paying dividends, has plenty in the bank, and has a strategy in place to move the company forward. However, retail conditions remain difficult, and a return of consumer confidence – perhaps spurred by falling interest rates – would be welcomed. 

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Travel

18 September – Nelson – Edward Lee

19 September – Blenheim – Edward Lee

20 September – Christchurch – Fraser Hunter

27 September - New Plymouth – David Colman

02 October – Tauranga – Johnny Lee

04 October – Hamilton – Johnny Lee

16 October – Albany - Edward Lee

18 October – Ellerslie – Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee and Partners Limited