OtagoNet goes south for top price

Monday, 1 December 2014

The purchase of 51 per cent of OtagoNet by two Southland electricity lines companies for $153 million may well prove to be a poor decision, Marlborough Lines chairman David Dew says.

The Power Company and Electricity Invercargill paid way over the odds for their extra slice of OtagoNet, the industry's regulator reckons. The stake they bought was held by their former partner Marlborough Lines.

The Commerce Commission, which values networks for price-setting purposes and determines the maximum rate of return they are allowed to earn on those assets, puts the value of the entire OtagoNet network (its regulatory asset base or RAB) at $147m.

That is the amount it will allow OtagoNet's owners to earn a return on, limited to 7.2 per cent a year for the next five years.

Even after deducting about $15m for the unregulated part of OtagoNet's business, the commission calculated the two Southland companies paid a 90 per cent premium for the 51 per cent of the network - the largest premium among four recent transactions it has examined.

Dew said the sale was unbelievable to him, but the figures confirm 'a spectacular result' for Marlborough Lines.

'There was a lot of pride [involved in the sale] and they were obviously willing to pay whatever it takes. I can't understand how the investment will ever pay off - I don't think it ever will.'

The rural Southland network, The Power Company, is the dominant partner in the joint venture, acquiring an additional 47.8 per cent of OtagoNet, against Invercargill City Council-owned Electricity Invercargill's 3.2 per cent.

PowerNet chief executive Jason Franklin, whose company manages the network, argues that the effective premium is much less than 90 per cent, if it exists at all, because the two Southland companies had paid just $53m for the 49 per cent they already owned, meaning they could afford to pay proportionately more for the balance and still end up 'very close' to what the updated RAB would be.

But the value of that original 49 per cent now is determined by the Commerce Commission value, not its nominal cost 12 years ago.

Franklin said the commission's $147m RAB does not yet include millions of dollars of capital work to be completed in coming months.

The two companies would also benefit from 'material' depreciation tax deductions, he said.

The commission acknowledges that a premium is often paid for control of a company. 'Given PCL's vested interest as both an owner and, through its subsidiary PowerNet, the network operator, it is reasonable to consider that PCL would see strategic value in acquiring control of OtagoNet.'

Even so, the next largest premium it found among the deals it looked at was about 30 per cent, paid by fund manager AMP Capital for 42 per cent of Powerco, an electricity and gas distributor.