Friday, April 07, 2006

Stock takes: Tell them they're dreaming

By Liam Dann

Despite the wishful thinking of a couple of Australian-based analysts at Credit Suisse, the suggestion that Telecom might be a takeover target any time in the near future is wildly implausible. The report - while making a sound financial case for a takeover - manages to underestimate hugely the political significance of the Kiwi Share legislation.

"With strong cashflow and a balance sheet under-leveraged, we view the potential of a leveraged buyout of Telecom as increasingly likely," analysts Justin Cameron and Mark Storey said in the report.

But under present rules, no individual or company can take a stake of more than 10 per cent in Telecom without the approval of the Minister of Finance. And no foreign entity can own more than 49.9 per cent of Telecom - end of story.

That is enshrined in legislation and the likelihood of this Government changing that is ... well there just is no likelihood.

Even a resurgent right-wing coalition would probably think twice given the kind of public uproar it would create. The sense of ownership people feel for the lumbering telco is easy to underestimate - particularly from the outside looking in.

Kiwis spend a lot of time beating up on it. But that is because we feel it is ours to beat up. We do it with the All Blacks too. It's how we express love in this bleak, cynical and overly negative nation.


Energy heating up

The Contact Energy share price is still rising. It hit $7.98 yesterday. Sources close to the Contact side of the merger plan have been quick to point out that currency movements have been the key driver of that rise, not a surge in speculation by arbitrage players. Basically, the divergence of the Aussie and Kiwi dollars (ours has fallen faster) is making the Contact stock price rise relative to the Aussie dollar valuation of the merger deal. They say the price is still almost exactly in line with the original value ascribed by the deal.

But local brokers remain sceptical.

"There is a clear consensus among domestic fund managers that the deal will not be done on its current terms," said one. "If there is a premium, then it's because they expect a sweetener. If there is no premium, it's because people think the deal won't be done - full stop."

Others were even more emphatic ... choosing to use words we still don't print in the Herald.


Rating game

Pyne Gould Corp-owned finance company Marac scored an investment grade S&P rating on Tuesday. That could be a significant step for them, said Mark Lister of ABN AMRO Craigs. A whole range of institutions have rules saying they can only invest in entities that have an investment-grade rating and this puts Marac on their radar screens.

"It should also go a long way to reduce Marac's cost of funds, widen the funding base for its debentures, and increase the margin between their lending and borrowing [so great for Marac's bottom line and its shareholders]," Lister says.

A few of the other smaller-sized finance companies have gone out and got themselves ratings of late. And that could have implications for the sector, Lister says. It may widen the gap between the high-quality operations and the rest.

It seems to have paid off in the past couple of days. PGC was already having a good run but has risen 15c since Tuesday to close at $4.39 yesterday.


Big bickies

Even those who were unsurprised by news last week that Pacific Equity Partners has bought biscuit-maker Griffin's (hopefully, that's anyone who reads this column) must have raised an eyebrow at the price that was paid. The final Kiwi dollar price of about $391 millon was somewhere between $50 million and $100 million more than anyone was picking.

The price is yet another example of the amount of excess capital floating around in Australia.

And while Griffin's was never a listing candidate, that was one big factor limiting the potential for local IPOs, said Wellington broker Ian Wadell. "Trade sales are going off at bigger prices than they would get on the stock exchange."

Unfortunately, the issue keeps coming back to the compulsory superannuation in Australia - now worth about A$800 billion ($950 billion). Those funds are looking for stable companies with good yields - exactly the kind New Zealand specialises in.


Meat in the sandwich

The spectacular dive in the dollar still seems to be doing little or nothing for the Affco share price. For some reason, the listed meat processor and exporter - which will certainly benefit from the low dollar - can't get past the 11 per cent premium that has been offered by its largest shareholder Talley's for majority control. Many of the other export stocks such as Sanford, Fisher & Paykel Healthcare and Appliances, have put on in excess of 20 per cent in the past six weeks in recognition of how far the dollar has fallen and how far it still has to go.

Affco looks like it's probably due a pretty good second six months, says industry analyst Allan Barber. But there is not a lot of broker coverage of the meat industry and investors seem to be slow to react to changes in operating conditions. Last year, when margins were getting seriously squeezed, the share price got ahead of itself trading up to 47c in November. Now when the news is looking good, it seems negative sentiment about the sector is scaring investors off. The shares closed up 1c at 39c yesterday - the same as the Talley's offer.


Floating to the bottom

What do Kazakhstan, Thailand, Lebanon and Guernsey have in common? They all have stock exchanges that raised more money through IPOs than New Zealand did last year.

Yes, if you thought the Commonwealth Games medal tables looked grim, check out New Zealand's performance in the 2005 Global IPO activity report put out by Ernst & Young last week.

Seems like last year was a boomer for new listings almost everywhere but here.

There were 29 countries with IPOs that totalled more than US$1 billion ($1.6 billion). New Zealand doesn't make that group - although the likes of Kazakhstan did.

We had just four IPOs valued at US$439 million. Take out the US$415 million Vector float and that number looks sickly. Australia, on the other hand, was fourth overall by value but was a silver medallist in the actual number of IPOs done. That's ahead of heavyweights such as the United Kingdom, Germany and Japan. For the record, the United States took the gold then in the finishing order were China and France.

Tim Howe, a partner of the local Ernst & Young arm, sees some positive signs despite the bad result.

He is picking the number of IPOs will grow steadily in the next few years as pressure builds on the supply and demand side.

Given the number of delistings the local market has experienced, there is clearly a lot of capital looking for a home. Okay, a lot of that may have headed offshore in the past few months to take advantage of the high dollar. But there is a growing number of investors (such as Waste Management holders) who will soon be looking for somewhere new to put their money.

On the supply side, there is a big demographic trend that will work in the favour of more IPOs. Basically, the country has a large number of reasonably-sized businesses that are privately held by entrepreneurs nearing retirement age.

A lot of them are going to be looking to realise some cash and one of the obvious exit strategies is clearly going to be NZX listings.


Rakon running hot

That's probably not surprising, given that it offers those with an interest in technology stocks the chance to get on board with Navman founder Peter Maire, who holds a 20 per cent stake. Maire is the closest thing New Zealand has to a Bill Gates/Steve Jobs-style tech guru.

Also, Rakon is easy to get your head around. It has real products. It has developed what it claims is the smallest GPS receiver in the world.

That sounds like pretty cool technology - what parent wouldn't want their child's mobile phone to transmit exactly where they were at any given time? It is expected the company will have a prospectus out around Easter.

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