Bill English yesterday announced that the sale of up to 49% of Genesis Energy’s shares will start from next month. But this time things will be different from the other sales. It appears that the Government is preparing itself for the likelihood that demand for the shares will be limited.
Mr English announced up to 49 percent of shares will be available from next month, with the company expected to be listed on the NZX in mid-April.
The shares will be priced at the beginning of the offer period, as opposed to the end as with previous sales. And unlike previous sales, US institutions will be blocked from owning Genesis shares.
The Government aims to float at least 30 percent of the company’s shares, but Mr English says the true number has not yet been decided.
“Our initial advice is that a smaller Genesis offer could increase price tension in the front-end book build by offering fewer shares to more bidders,” he says.
“We will not know that until we further test demand in the market, where investors now have a wider choice of several energy companies.”
This is basically an admission that the share sale process is flawed. Treasury had advised the Government to release no more than $1 billion worth of shares in a 12 month period so that the shares could be absorbed by the market. The Government has released $4 billion worth of shares in the past 12 months.
Genesis was estimated as being worth $1.8 billion in November last year. If only 30% of the shares are sold then $540 million can be expected before realisation costs are taken out. But the figures are likely to be a lot worse.
The Government is considering setting the price so that there is an expected dividend yield of 9% return on investment for the shares. The last financial year’s dividend payment was $114 million. If you extrapolate this figure on the basis that the return on investment is 9% then the company is worth $1.26 billion, which suggests that the sale of 30% of the company will yield only $380 million before sale costs. When you think about the cost of sale and the proposed loyalty bonus National is getting to the stage where it is giving our shares away.
If this amount only is achieved then the Government will fall short of its minimum expectation of $4.4 billion being raised by asset sales.
David Cunliffe has said:
John Key has given up on the Genesis sale before it has even begun by saying he may only be able to sell just 30 per cent of the state asset, Labour Leader David Cunliffe says.
“Everyone knows the Genesis sale is going to be a failure, from the public to investors to Treasury. Now it turns out even John Key knows it.
Not only is it a bad idea to sell off assets in the first place, it’s economic idiocy to sell three in the space of a year. The sharemarket just isn’t that interested. That’s why John Key has admitted he may not be able to sell the full 49 per cent.
Nothing shows this Government has run out of ideas more than the return of the ‘buy-one-get-one-free’ scheme of Mighty River Power. Since then they’ve tried ‘buy-now-pay-later’ with Meridian and ‘Grab-a-Share’ with Air New Zealand but with little success.
John Key has already effective admitted that the asset sales programme has failed. It’s been so unpopular and so unsuccessful that he’s had to say ‘no more sales’ after the election.
He should listen to the people and stop the sales right now. The Genesis sale is the last cab off the rank. The Government should leave it there.”
You have to wonder why the Government is continuing with the share float. It does not make financial sense and it is terribly unpopular. There is a sense that a combination of ideological belief that the state should not own anything combined with a politically belligerent refusal to back down are the reasons the Government will continue with the float.