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Woodward Research tackles assumptions on asset sales

Woodward Research tackles assumptions on asset sales
Labour has staked its election campaign upon a promise to retain SOEs in New Zealand – but are asset sales the devil in disguise as Goff paints them out to be?

Labour has staked its election campaign upon a promise to retain SOEs in New Zealand – but are asset sales the devil in disguise as Goff paints them out to be?

Financial analysis and equity research specialist Woodward Research today issued a few choice comments in response to public perceptions of potential asset sales by the government.

As senior analyst Nick Lewis puts it: “The proposed mixed ownership model, or asset sales, has become the defining issue of this election, yet we still see serious misperceptions of this crucial issue."

If re-elected, the government plans to proceed with IPOs of four SOEs including the electricity generator/retailers Genesis Energy, Meridian Energy, Mighty, River Power, and coal resource company Solid Energy. The government also said it would seek to further reduce its stake in Air New Zealand from its current 74 percent interest.

National has said the government would maintain legal control of the four electricity companies by retaining at least 50.1 percent interest, and that the average retail investor in New Zealand would be “at the front of the queue” to gain access to shares in these companies.

So will Kiwis lose control over these assets, and will the sales really generate much-needed cash?

Foreigners will end up owning these companies: Woodward says this is unlikely. While some SOE shares will undoubtedly find their way into the portfolios of investors outside of New Zealand legal control of the companies will remain with the Crown. The IPOs will likely attract overseas investors such as the Australian superannuation funds but they are unlikely to want more than 5 percent shareholdings and will not want to exert any meaningful influence. The IPOs are also to unlikely to attract overseas strategic investors because such investors would want control. And there is an additional financial incentive for New Zealand residents to own shares because of the imputation credits that are available to them on the dividends they receive, credits that are not generally-available to non-resident shareholders.

The New Zealand government will forego hundreds of millions of dollars in dividends: This is true. The government received dividends of $733 million in fiscal 2010 and $799 million in fiscal year 2011 from the four SOEs (excluding Air New Zealand). Therefore, if the government were to sell 49 percent of the four SOEs, its dividend income stream from those four companies would likely drop by approximately $375 million per year. However, the Crown would have also gained a one-time cash inflow of $5 to $7 billion dollars. Therefore, in theory, the government will be fully compensated for its foregone dividends. The more important question then becomes, how will that one-time cash injection likely be used.

The government can pay down a lot of debt with the proceeds of asset sales: The government has issued approximately $71 billion of debt (which does not include debt of companies or individuals) so the $5 to $7 billion in IPO proceeds would reduce the government outstanding debt by 10 percent at most. However, the more likely scenario is that the proceeds will be invested in a combination of public good such as education or health care, and debt repayment.

Public shareholders will demand more operational and financial efficiency of the SOEs: The widespread churn of customers between the generator/retailers today, including NZX-listed Contact Energy, suggests competitive forces are already creating ample pressure on the boards and management teams to operate the companies efficiently. It is therefore doubtful that there is much more efficiency to be gained from the addition of public shareholders that does not already exist by virtue of the fierce competition in the electricity sector.

Once these assets are gone, they are gone forever: This is not necessarily true. While unusual, there are precedents overseas where companies have been sold by governments only to be partially or fully re-acquired by those same governments if circumstances deem it to be in the public’s best interest at that time – the government’s varied ownership interest of Air New Zealand over the past decade is an example.

Four new listed companies will improve the financial markets in New Zealand: True. Four new billion-plus dollar market capitalization companies will add significant depth and liquidity to the NZX stock exchange. Moreover, the income-oriented nature of these dividend-paying companies will be seen as relatively conservative investments and will broadly appeal to the average retail investor. It would also provide more assets for the growing KiwiSaver funds, and should help to keep more of that money in New Zealand rather than forcing those portfolio managers to seek shares overseas.

In most countries, the government owns the electricity companies: This is generally true for developing countries but not so for developed countries. An informal review of the 34 member countries of the Organisation for Economic Co-Operation and Development (OECD) suggests that the majority of OECD countries have to some degree sold electricity companies via trade sale or IPO.