There are many troubling things about the Meridian share float. Blowing $1.1 billion of our equity as well as the cost of selling the shares is just the start. But you have to wonder if the price is too cheap.
For instance why wasn’t the float cancelled? After all according to the offer document “[t]he Offer may also be withdrawn at any time before the allotment of Instalment Receipts in the absolute discretion of the Crown.” My reading of the document is that the allotment occurs in a couple of days time. Theoretically the Government should forgo the float and it it was thinking of the interests of the country it would do so. Expect however political interests to trump any such thoughts.
The prospectus indicates that the return on investment for the first 12 months will be over 10%. Get this, we are paying down debt with an interest rate of about 5% so that we can lose an income stream which in the first year will be twice that amount.
Over in the United Kingdom the tories are engaged in a similar process in selling a public asset for way less than it was estimated to be worth. Royal Mail has recently been privatised at an enterprise value of £4.1 billion. The trouble with this is that many Banks approached for a vaulation suggested that it is worth more than twice that amount.
JPMorgan told the Government earlier this year that it believed Royal Mail could be worth up to £10bn, including its debts, ahead of the postal operator’s privatisation.
Sky News has learnt that corporate financiers from the Wall Street banking giant presented a spectrum for Royal Mail’s value ranging from £7.75bn to £9.95bn – the top end of which was more than two-and-a-half times the price at which ministers ultimately sold shares in the company in the most important state asset sale for decades.
The Government sold shares in Royal Mail for 330p each earlier this month, valuing the company’s equity at £3.3bn.
Including its roughly £800m of net debt, the privatisation effectively attributed an enterprise value to the company of £4.1bn, above the average valuation of £3.6bn ascribed to it by the nearly two dozen firms which pitched to advise on the sell-off.
The Government has ridiculed these claims but the share price has soared from 330 p each earlier this month to around 530p a couple of days ago. At this price the group’s value is about £6.1bn including net debt.
Billy Hayes, General secretary of the Communications Workers Union has said:
On the opening day of the flotation Vince Cable wrote off the undervaluation as froth. A week later, we were told it was the fault of the CWU. We now have a prima facie case of a conspiracy against the UK taxpayer who were opposed to the sale and have now been robbed of billions. In any other walk of life this would be a sacking offence and we call on Vince Cable to resign. A full inquiry should be launched into the mis-handling of this unnecessary privatisation by Vince Cable. We would also like the matter to be referred to the public accounts committee to scrutinise how badly the taxpayer has been left out of pocket.
What will be interesting is the information relied on by Cabinet to set Meridian’s share price. I suspect that as in the UK the price was set low to make sure that the shares sold and to give a healthy return to investors. It may be that National has followed the UK example. Its obvious intent to make sure that the Genesis float succeeds is obviously a major consideration.
It is clear that in the United Kingdom and in New Zealand we have Governments intent on divesting collectively owned assets so that the wealthy can increase their wealth.
Shame on them.