Contact – sale of the century?

If the Government had sold 53.1 per cent of Contact Energy at $4.65 a share this week, the howls of political outrage would still be ringing in the streets. Instead, the sale at a discount of nearly 8 per cent to Contact’s last traded price of $5.02, on Monday, prompted investors to liquidate other key stocks to grab Contact shares at a very attractive price.

As the head of research for Craigs Investment Partners, Grant Swanepoel, put it: ‘‘Who would have thought in the last five years that Contact Energy would be offloaded by Origin at a price of $4.65? It’s not a desperate price, but it’s certainly a willing seller!’’

Faced with a threat to its investment grade credit rating owing to a nasty combination of cost over-runs on its A$25 billion (NZ$28b) Queensland liquefied natural gas project and slumping world gas prices, Origin chose – some would say panicked – to jettison its Contact shares cheaply to get some cash in the bank.

Efforts to find a new majority shareholder apparently failed, so the only other option was to attract as wide a pool as possible of local, overseas and retail investors.

The result leaves Contact in a place it has never been before – as master of its own destiny.

The first electricity state-owned enterprise to be carved out of the old Electricity Corporation of New Zealand, Contact was created almost 20 years ago to the day.

The 1999 sale of a 40 per cent cornerstone shareholding to California’s Edison Mission Energy was the first partial privatisation of a power company.

It would be another 14 years before that happened again.

The rest of Contact was sold in a public float shortly afterwards and Edison quickly moved to a majority stake, mounting an aborted takeover bid in 2001.

In 2003, Edison sold out to Origin, which then also tried and failed to take Contact over, mounting a merger offer in 2006 that got such a resounding raspberry from the New Zealand investment community establishment that Origin managing director Grant King swiftly pronounced the offer ‘‘stone, mother-cold, dead’’.

There were fears for the loss of a large, liquid stock from the under-nourished local stock exchange and a grab for Contact’s balance sheet to fund Origin’s plans elsewhere.

The latter fear may have been justified. Origin infamously made two related party asset sales to Contact at prices that made no sense to anyone but Origin.

Contact’s suggestion earlier this year of spending emerging free cash flow on overseas geothermal expansion also smacked of Origin planning adventures on Contact’s dime and was panned by institutional shareholders, who had waited through five years and $2b of capital spending on new electricity plant for increased dividends.

That plan was swiftly abandoned, a special dividend of 50 cents a share declared and paid in June, and then, this week, Origin was gone.

Of course, if the Contact-Origin merger had gone ahead, Contact shareholders would have ridden a wave that took Origin shares above A$18 (NZ$20) in 2011, while Contact’s share price performance has been a slug by comparison.

It rose after the failed merger by about $2 a share through to 2008, but the Origin share price almost doubled in the same period. And since early 2009, Contact has struggled to crack $6 a share.

From a pure capital growth perspective, Origin would have made a great 100 per cent owner of Contact.

However, that was not to be and Contact is now a free agent, competing in a market where demand growth is static, retail competition is intensifying, and new technologies could soon shake the industry as fundamentally as the Internet shook up newspapers and telephone companies.

Consumers have learnt not to love their power providers and are champing at the bit to generate their own power as soon as options like roof-top solar become affordable – which is almost the case now – and for opportunities to control their power bills through smart meter technology and greater energy efficiency.

With a glut of generation capacity, the mid-2000s risk of exposure to sharp spikes in wholesale electricity prices is gone for now, paving the way for new entrant retailers like Flick Electric to give households the same ability to ride the spot market as an industrial plant. Things could change very fast. The good news for Contact is that it has scale, with more than half a million customers. Its power generation has been upgraded and now includes more renewable energy sources.

It has just finished a long and painfully expensive project to update its retail systems. The rumour mill suggests a tie-up with Infratil-controlled TrustPower would give useful additional scale along with the thing that Contact has struggled to create – a retail brand that’s liked and respected.

Contact will also have continuity of leadership, thanks to its highly respected chief executive Dennis Barnes, an Origin secondee, jumping ship to stay at Contact.

Also vital will be the composition of its new board, including almost certainly a new chairman.

Three Origin appointees – Grant King, Karen Moses, and David Baldwin – are all departing. Bruce Beeren, an Origin appointee now no longer associated with the company, looks unlikely to stay.

Contact’s three independent directors are Phil Pryke, who moves from deputy chairman to interim chairman, Whaimutu Dewes and Sue Sheldon. Neither Dewes nor Sheldon are obvious choices for the chair.

While Pryke might like the chair – he’s held it before and has been involved with Contact since the start – his reputation may be too tarnished by the widely held view that he was too willing to go where majority shareholders led. Auckland’s housing boom might be spreading and the Reserve Bank should be worried, an economist warns.

Signs of a trickle-down effect were evident in figures from official valuation service QV on Tuesday, indicating Aucklanders are cashing up and moving out to the nearby Waikato, Northland and Bay of Plenty, or using their equity to buy rental properties there. Real estate agents in other North Island areas are also reporting stronger competition, if not price rises, in areas that have been flat for years.

Economist Rodney Dickens of Strategic Risk Analysis said the rapid improvement in house sales outside Auckland was a risk the Reserve Bank could not ignore.

‘‘I think [Reserve Bank governor] Graeme Wheeler is so focused on the fall in dairy prices and is assuming away the interest rate stimulus in the pipeline.

‘‘To me it means house price inflation is going to turn out significantly stronger than the Reserve Bank is forecasting.’’

There was a poor correlation between falling dairy prices and house prices, Dickens said.

‘‘Dairy farmers will cut spending in certain areas but they have very little to do with what happens in the housing market,’’ he said.

Meanwhile, ‘‘you’ve got a cocktail of super-low interest rates and strong population growth’’ which included Kiwis from all over the country not leaving for overseas.

April’s doubling in first-home buyer grants had also had an impact. Dickens, who is a former Reserve Bank strategist, said more interest rate cuts could risk a boom like the mid-2000s.