Monday, March 13, 2006

Phil Pryke: Merger is good for business

Contact Energy's independent directors are not surprised that shareholders are questioning if the proposed Contact-Origin merger is in the company's best interests. Much of the coverage to date has misunderstood the transaction and its strategic rationale.

The issues at stake are simple:

Is combining the two companies into one business a good idea? And are the terms fair?

The independent directors of Contact believe this is the best way to bring the companies closer, unlock value and achieve long-term growth.

The proposed merger will create the largest integrated energy company operating across Australasia, while allowing us to secure Contact's continuing momentum as a strong locally listed company.

The scale and diversity of the merged company will allow the Contact Energy business in New Zealand to address more effectively the key strategic challenges it faces in securing fuel for its current and proposed thermal generation plants. This will be good for shareholders and good for New Zealand consumers.

Contact will remain listed on the New Zealand Stock Exchange, with fully imputed dividends intact.

This is not "another takeover proposal" (Herald, February 24). If it were a takeover there would be no Contact shareholders after the transaction was completed.

Contact shareholders will retain their shares and have the opportunity to go along for the ride in a much bigger and more diversified business.

Claims that Origin is planning to take over Contact without paying a premium for control also fail to acknowledge the reality - Australian-based Origin is Contact's majority and controlling shareholder, and has been for around 18 months.

Contact minority shareholders' voice will be enhanced, compared with the current situation where they can always be outvoted by the majority shareholder. Under the merger Origin's Contact shareholding will be cancelled.

The relevant question now is the relative valuation of Contact and Origin. The merger values both companies based on market prices over the last nine months.

The independent directors consider that the proposed calculation is fair to Contact shareholders. The independent advisers report that has been commissioned will further inform that issue.

We agree that Contact's minority shareholders have not been "meek followers of trends", as the Herald put it. The proposed merger explicitly recognises this. As directors, we have made a judgement call.

Based on the best advice available and a deep knowledge of the company, we have negotiated a structure that will allow shareholders to remain in a major New Zealand listed energy company, while taking part in a wider growth opportunity.

The board is highly conscious of the challenges faced by the company. Contact has been through two growth stages in its first decade; the original formation in 1995 followed by privatisation in 1999, and our subsequent and very successful consolidation as a high-performing retail and generation company.

But we are now entering a third phase in which Contact shareholders are exposed to many significant long-term business risks. Maui Gas has almost run out, and for the company to have a more certain future it has to secure fuel for existing and proposed gas-fuelled stations. There is no doubt that the merger reduces the risks inherent in meeting these challenges. The group will be much stronger financially, with a combined skill and asset base, and will have a common goal in pursuing its aligned interests.

Finally, there has been some speculation that the merger would somehow result in New Zealand becoming totally reliant on imported liquefied natural gas and would foreclose all other energy options. The fact is that LNG will only make sense if it is competitive with other sources of electricity generation. The energy sector is competitive and other companies and the Government will continue to develop and promote a balanced mix of thermal and renewable technologies.

The bottom line is that the proposed merger gives Contact's shareholders an immediate investment in an integrated energy business that is much larger, financially stronger and more diverse. That means a greater capacity to manage risk and capture growth opportunities while retaining our brand and company in the New Zealand energy and share market.

The alternative is more uncertain and could see us not fully realising the potential long-term shareholder value of a combined Contact and Origin.

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