Latest / The SME Stream / Powerhouse: Why Contact Energy wants $2b Manawa merger [VIDEO]

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Powerhouse: Why Contact Energy wants $2b Manawa merger [VIDEO] · The SME Stream

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  Speaker 1: The information provided in this program is of a general
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  Speaker 1: nature and is not intended to be personalized financial advice.
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  Speaker 1: We encourage you to seek appropriate advice from a qualified
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  Speaker 1: professional to suit your individual circumstances. It's the biggest deal
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  Speaker 1: in our electricity industry since the mixed ownership model began.
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  Speaker 1: Contact Energy wants to buy all of Manaware how much
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  Speaker 1: of a powerhouse will the companies be? What would you
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  Speaker 1: say to competitors, Mike, the likes of Meridian, the likes
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  Speaker 1: of Genesis, Mercury. Looking at this, should they be a
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  Speaker 1: bit scared about how big you're going to be? Now?
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  Speaker 2: I wouldn't use the term scared. We're always up for competition.
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  Speaker 2: We enjoy competition.
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  Speaker 1: All eyes are on the electricity industry as dry hydro
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  Speaker 1: lakes and a gas shortage sent wholesale prices to new highs.
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  Speaker 1: Industrial users without fixed contracts are hurting the most, but
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  Speaker 1: all of it keeps upwards pressure on retail prices. Our
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  Speaker 1: electricity industry is led by four major generation retailers aka
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  Speaker 1: gent tailors. Meridian is the biggest, producing about eighteen percent
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  Speaker 1: of the country's electricity. It owns the Manapuri and White
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  Speaker 1: Tucky dams. As well as wind farms nationwide. Mercury is
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  Speaker 1: also big on hydro with its main assets along the
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  Speaker 1: Waikatou River. Genesis is the system's backup with its Huntley
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  Speaker 1: Power station, and Contact Energy is big on geothermal. Contact
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  Speaker 1: is the only gentailor not majority owned by the government.
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  Speaker 1: There used to be a fifth player, Trust Power, but
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  Speaker 1: it's sold its retail business to Mercury in a four
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  Speaker 1: hundred and forty million dollar deal. Now it's called Manowa
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  Speaker 1: and does generation only, with twenty five hydro electricity assets,
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  Speaker 1: producing nine percent of our total hydro capacity. It's majority
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  Speaker 1: owned by infrastructure investor Infratil. It's held onto the assets
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  Speaker 1: since it listed in nineteen ninety four, but now they're
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  Speaker 1: about to sell it. Contact wants to acquire all of
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  Speaker 1: Manowah and a deal worth two point three billion dollars
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  Speaker 1: and a mix of cash, shares and debt. Contact CEO
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  Speaker 1: Mike Hujin chairman Rob McDonald have been and talks about
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  Speaker 1: this all year. They told me the merger is all
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  Speaker 1: about hydro electricity. Contact owns the Clyde Dam on Lake
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  Speaker 1: Dunstan down South, but aside from that it's failed to
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  Speaker 1: make a significant mark and hydro generation. It's why it's
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  Speaker 1: so attracted to acquiring Mnowa's assets. On the day the
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  Speaker 1: deal went public this week, Mike and Rob took some
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  Speaker 1: time to talk about the power this historic deal may hold. Mike, Rob,
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  Speaker 1: thank you so much for doing this together. Appreciate it.
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  Speaker 1: Let's talk about size of the deal first. This is
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  Speaker 1: one of the biggest deals I've seen in years. I mean, Rob,
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  Speaker 1: how historic is this? Yeah?
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  Speaker 3: I think you have to go all the way back
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  Speaker 3: to the original programmers of sale. That's some time ago,
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  Speaker 3: more than ten apps. So the deal itself is when
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  Speaker 3: you put the script and the cash together, that's one
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  Speaker 3: point nine billion dollars. When you think about the enterprise value,
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  Speaker 3: that comes to two point three billion dollars. So yeah,
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  Speaker 3: quite a sizeable.
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  Speaker 1: Deal, Quite a sizable deal. Fair to say, who started this, Mike,
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  Speaker 1: who approached to and when I'm imagining you've been working
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  Speaker 1: on this behind the scenes for a while now.
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  Speaker 4: Yeah, we have been looking working on this behind the
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  Speaker 4: scenes for a while.
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  Speaker 2: We approached Manua some time ago, but we've been thinking
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  Speaker 2: about it for quite a while before then because we
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  Speaker 2: could see some of those portfolio benefits.
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  Speaker 4: They were very clear to us.
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  Speaker 1: Tell me a bit more about that. What was the
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  Speaker 1: initial thought where you thought we should go in and
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  Speaker 1: acquire We feel like we need to slam do balance
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  Speaker 1: sheets together it.
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  Speaker 2: Oh, look, there's a couple of things. Our hydro portfolio
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  Speaker 2: in particular is some are springs, some are weighted, and
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  Speaker 2: we've always made up for that with having thermal peaking.
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  Speaker 4: Well, obviously we want to face that out.
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  Speaker 2: And then you have to turn your minds, well, how
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  Speaker 2: do we make up for that in the winter, And
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  Speaker 2: you've got manner as hydrogeneration which is both geographically diverse
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  Speaker 2: but also is weighted towards winter, And that's what makes
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  Speaker 2: you think, actually, this will help us get to get
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  Speaker 2: us to our future faster.
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  Speaker 1: Where does this then rank you if this goes a
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  Speaker 1: heare We are going to talk about approval a little
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  Speaker 1: bit later on, but if this does go aheare, where
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  Speaker 1: would this rank you in terms of generation capacity? Because
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  Speaker 1: notion that Manawa now hasn't a retail business, but in
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  Speaker 1: terms of size and scale for your generation megawatt power,
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  Speaker 1: how big of a powerhouse will you be?
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  Speaker 2: So we'll have a title of about ten and a
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  Speaker 2: half ten of what ours as we are today, which
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  Speaker 2: puts us second in the market behind Meridian, behind Meridian,
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  Speaker 2: and gives us about twenty four percent of the market,
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  Speaker 2: which just should settle any anxiety about market dominance or
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  Speaker 2: anything like that.
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  Speaker 1: Rob. There will be some people looking at this deal
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  Speaker 1: thinking that the last thing we need right now is
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  Speaker 1: less competition in the electricity industry. What would you say
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  Speaker 1: to people with those thoughts.
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  Speaker 3: I think the first thing you're going to look at
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  Speaker 3: is what this actually produces. And putting two sets of
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  Speaker 3: diverse hydro assets together, one as Mike's described, summer weighted
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  Speaker 3: and springweighted versus a winter weighted and what that does
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  Speaker 3: is actually allow us to, through our risk management strategies,
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  Speaker 3: actually sell more power into the forward market. And the
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  Speaker 3: importance of that is that means we can give more
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  Speaker 3: fixed contracts to major industrial users, which we do now
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  Speaker 3: but sort of supercharges, and also to independent retail it
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  Speaker 3: as well. So when we look at this, we actually
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  Speaker 3: think about it increasing competition in the longer.
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  Speaker 1: So more fixed price contracts at lower prices, that's what
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  Speaker 1: you're insinuating there. Yes, Mike, do you really expect the
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  Speaker 1: Commist Commission to approve this given what's happening in the
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  Speaker 1: sector right.
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  Speaker 2: We would not be sitting here today if we didn't
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  Speaker 2: have a high degree of confidence at the Commerce Commission,
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  Speaker 2: after doing their.
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  Speaker 4: Job, approves this. We believe that the little hearts are
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  Speaker 4: competitive of the market.
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  Speaker 2: The deeper portfolio that we have will enable more renewable
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  Speaker 2: generation to be built, which will only bring down with
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  Speaker 2: pressure on prices, and so we see this as a
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  Speaker 2: real positive for the market.
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  Speaker 1: No shade on this deal at all, but often when
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  Speaker 1: there is consolidation between players of this size in any market,
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  Speaker 1: it can, for lack of a better term, sometimes look
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  Speaker 1: like a bit of desperation, like a survival tactic, because
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  Speaker 1: you need to put two balance sheets together to survive.
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  Speaker 1: Is that what this is? Because the industry's in hard.
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  Speaker 2: Times, This is about opportunity. Manua has a fantastic set
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  Speaker 2: of assets, They have a fantastic set of development options,
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  Speaker 2: They have a fantastic set of people. We believe that
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  Speaker 2: bringing the two together creates opportunity both for us but
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  Speaker 2: also for the country.
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  Speaker 1: Does it allow you to invest more in things like
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  Speaker 1: renewables which you're already.
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  Speaker 4: Throwing Absolutely absolutely so.
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  Speaker 2: The one thing that people are discovering the world over
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  Speaker 2: that intermittence qui firming and firming is the secret source
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  Speaker 2: which is going to make the transition happen. And by
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  Speaker 2: bringing the hydro assets in behind the intermittent renewable development pipeline,
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  Speaker 2: you're able to boild more renewable energy and thereby firm
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  Speaker 2: that electricy to provide a very secure supply to ordinary
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  Speaker 2: key with.
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  Speaker 1: You've said that this is going to increase resilience in
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  Speaker 1: the system if you have more control over generation in
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  Speaker 1: more locations. Can you used to expand on how that
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  Speaker 1: actually works outside affirming? How does having more control of
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  Speaker 1: a more generation mean that there will be less dips?
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  Speaker 2: So if you think of our and Dorin talk to
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  Speaker 2: this in some detail, but if you think of our
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  Speaker 2: some awighted Cluther system. So we try and hold the
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  Speaker 2: water back as much as possible as we go into
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  Speaker 2: winter to make sure that we're not caught short in winter.
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  Speaker 2: But if you know which can sometimes lead If you
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  Speaker 2: suddenly get one of those May rain storms, you end
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  Speaker 2: up spilling and energy is wasted. But if you know
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  Speaker 2: that your other hydro assets are going to be there
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  Speaker 2: for you in June July, then you can produce the
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  Speaker 2: power more aggressively over April may and be less conservative
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  Speaker 2: in holding the water back, and that overall in and
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  Speaker 2: of itself.
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  Speaker 4: Just leads to less spill and more efficient generation of energy.
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  Speaker 1: So bottom line, you're telling me that if say this
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  Speaker 1: deal went ahead last year, for example, we wouldn't have
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  Speaker 1: had this year's energy industry situation.
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  Speaker 2: I'm not saying that we wouldn't have had it. It
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  Speaker 2: maybe wouldn't have been as dramatic.
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  Speaker 1: It's a very tidy deal, Rob. Whenever I cover these things,
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  Speaker 1: I mean, if you look at it's a recent takeover
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  Speaker 1: offers that we've seen on the market to bring one
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  Speaker 1: up Stephen Tindall's offer and bid for the Warehouse Group
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  Speaker 1: that wasn't all tidied up and sort of neatly seamed
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  Speaker 1: up behind the scenes. This one is in terms of
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  Speaker 1: going to Infratill, the majority owner of Manaware, who owned
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  Speaker 1: this asset for Dare I say it a year longer
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  Speaker 1: than I've been alive? How hard was it to get
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  Speaker 1: this deal all so on up behind the scenes and
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  Speaker 1: then bring it to market with it almost fully approved.
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  Speaker 3: Yeah, it's been a journey and over several many months.
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  Speaker 3: It's fair to say, though I think everyone had the
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  Speaker 3: same vision that both assets would come together and make
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  Speaker 3: a better set of hydro assets. And that's a really
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  Speaker 3: key and important thing, A big voting confidence in Contact
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  Speaker 3: Energy by and fratill to say we're willing to be
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  Speaker 3: a shareholder, and with Dion Campbell coming on the board,
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  Speaker 3: something we welcome. That's got a long history in formerly
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  Speaker 3: trust out but also obviously Manawa and he brings a
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  Speaker 3: whole raft of experience in renewable energy of recent times
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  Speaker 3: as well, so we certainly welcoming as well.
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  Speaker 1: What would you say to competitors, Mike, the likes of Meridian,
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  Speaker 1: the likes of Genesis Mercury looking at this, should they
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  Speaker 1: be a bit scared about how big you're going to be?
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  Speaker 2: Now, I wouldn't use the term scared. We're always up
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  Speaker 2: for competition. We enjoy competition. Competition is what keeps us lean.
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  Speaker 2: Competition is what drives down the cost of development opportunities.
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  Speaker 2: And so it's going to bring more competition.
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  Speaker 1: Bring it on twenty twenty five. Do you think it's
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  Speaker 1: going to go ahead?
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  Speaker 4: Absolutely confident that we'll go ahead.
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  Speaker 1: Yes, we'll talk again next year. Thank you boy so
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  Speaker 1: much for your time. Appreciate it.
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  Speaker 4: Good stuff.