Meridian Sale to Boost New Zealand Budget

WELLINGTON, New Zealand--The New Zealand government said the biggest sale of a state-owned asset in the country's history could raise at least 1.9 billion New Zealand dollars (US$1.6 billion), further strengthening the national budget at a time when the economy is gathering momentum.

New Zealand plans to sell up to 49% of power generator Meridian Energy Ltd. in an initial public offering late next month that will be the latest test of investor appetite for assets that have been in state hands for decades.

Already the South Pacific nation has raised NZ$1.7 billion from the sale of another electricity generator--Mighty River Power Ltd. (MRP.NZ)--and the government also plans to reduce its interest in Genesis Energy Ltd. and national flag carrier Air New Zealand Ltd. (AIR.NZ).

The privatization program, worth an estimated NZ$5 billion overall, aims to help New Zealand return to a budget surplus in the fiscal year through June 2015.

Once a relative laggard among developed economies, agriculture-rich New Zealand is now outperforming many of its peers owing to high dairy prices and billions of dollars of investment in rebuilding the southern city of Christchurch following a devastating earthquake in 2011. New Zealand's economy expanded by 2.5% on-year in the second quarter, outpacing the expectations of economists who thought a severe drought would have been more of a drag on growth.

Robust economic growth is giving a lift to consumer spending, business confidence and the appetite of investors for riskier assets like shares. The NZX-50, the country's benchmark, hit an all-time high Thursday and some newly listed stocks like NZ$1.5 billion-valued fuel distributor Z Energy Ltd. (ZEL.NZ) have also gained strongly.

On Friday, the government said the indicative price range for the sale of a minority stake in Meridian Energy would be between NZ$1.50 and NZ$1.80 a share for institutional investors and NZ$1.50 to NZ$1.60 for retail investors. The final price is expected to be announced Oct. 23.

The retail offer is capped in order to persuade individual investors that their applications to buy shares will have a greater chance of success, Finance Minister Bill English said. The government aims to ensure that 85% to 90% of the company remains in New Zealand hands.

For Rickey Ward, head of equities at fund manager Tyndall New Zealand, the indicative price range was in line with his expectations. "While we have a price for everything, our valuation fits with the range they provided so we'll definitely participate," he said.

According to the government, Meridian Energy could have a market value of around NZ$5.0 billion when it lists on Oct. 29. The sale of shares in the generator and other state assets is expected to boost the value of New Zealand's NZ$69 billion stock market by about 10%.

Earlier this year, the government struck an eleventh-hour deal to keep open New Zealand's only aluminum smelter, which accounts for around 14% of national power demand and takes around 40% of Meridian's energy output. Rio Tinto PLC (RIO), the majority owner of New Zealand Aluminium Smelter, had threatened to close the operation unless Meridian lowered power prices, claiming it would otherwise be unprofitable.

As part of the deal with the government, Rio Tinto and Sumitomo Chemical Company Ltd. (4005.TO) committed to keeping the smelter running until at least January 2017, and potentially through 2030. Rio owns 80% of the smelter, with Sumitomo holding the remaining interest.

-Write to Rebecca Howard at [e-mail]

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