The incentives the Government is dangling before prospective investors in Meridian Energy show just how much pressure its "Mixed Ownership Model" policy is under.
Some things sell on their merits alone. Icebreaker. BMW. Wooing Tree Pinot Noir. Sure, they may throw in the occasional discount or sweetener to clear inventory or get over a flat patch, but on the whole the purchaser is prepared to shell out top dollar based on confidence that she or he is getting quality in return.
Other products require the full range of marketing tricks to encourage customers to open their wallets and commit to the sale.
Cue all those late night infomercials, where you are shown a product and its alleged wondrous properties. Still not going to buy? Then you're told the low, low price! Still not interested? You don't have to pay for it all now, but can spread it over several instalments!! Want more? Well then, how about two-for-the-price-of-one!!! Won't bite? We'll throw in a set of steak knives as well!!!!
The Government's press release about the share offer for Meridian Energy has more than a whiff of this sort of Shelley "The Machine" Levene desperation about it.
After all, here's what the Government claims to be selling:
Meridian is New Zealand’s largest electricity generator, using only renewable wind and water resources and producing over 30 per cent of the country’s electricity. It has more than 270,000 connections to homes, farms and businesses, and a track record of strong and stable operating cashflows.
That sounds like a pretty good business to be a part of, doesn't it? It's a big, established player. People always want electricity. Clean and green is the way of the future. Should sell itself, right?
Well ... apparently not. Because the Government is reaching for the full bag of tricks (short of the free steak knives, that is) to try and drum up enthusiasm for its partial sell down of this jewel in our energy generating crown.
First of all, there's the "pay some now, the rest in 18 months" nature of the offer. All you need to do to share in the sweet, sweet honey of Meridian's dividends is put down $1 per share on October 29,
Then note what that "pay some now, the rest later" model does to your return on investment for that first year-and-a-half:
Paying in two instalments gives investors a higher dividend yield during the instalment period. Meridian is forecasting an implied gross instalment yield of 13.4 per cent over the first 12 months. This is based on Meridian’s underlying gross share dividend yield for New Zealand retail applicants of 8.4 per cent to 8.9 per cent for the same period, which is the level of return if an investor had paid for the shares in full.
In other words, buying under this model turbo charges your personal gain for the next year-and-a-half (out of dividends that previously would have gone to general Crown accounts).
But what happens at the end of that 18 month period, when you have to pay for the rest of your shares? Might not the value have dropped in the interim, so that you end up having to pay more for them than they are now worth on the market? After all, that's what investors in Mighty River Power have seen happen - those shares they happily snapped up at $2.50 are now worth $2.22 each (or, a 11.2% loss of value).
Well, the Government is doing its utmost to guarantee that won't happen either. Because the extra top-up payment that "retail" (i.e. the sainted "Kiwi Mums and Dads" of political fairyland) investors will have to pay in April 2015 will be no more than $0.50-$0.60. But "institutional" investors - the big, bulk purchasers of shares who really drive the demand - will have to pay anywhere from $0.50-$0.80 more.
In other words, when you have to pay your extra in 18 months time, the people who will really want more of Meridian's shares are already going to be paying more for them than you have to, which almost certainly guarantees that their market price is going to be higher than the amount you've paid for your shares.
So it isn't an absolute guarantee that the shares held by retail owners won't lose value - because nothing is certain in this crooked vale of tears. But it's a risk that hardly appears to justify a 13.4% likely return - especially when (for instance) UDC Finance Ltd is offering just a 4.3% return for the same term of investment.
Why, then, is the Government being so generous to potential retail investors in Meridian?
Well, I think we all know the answer to that. For this sale process to be a "success", the Government doesn't have to raise as much money as it can from it. It needs to get some money, sure - but maximising the capital return is not the primary objective.
No, for the sale to succeed, the Government has to be able to say that the company has gone into the ownership of "ordinary Kiwis" ... thousands and thousands of ordinary Kiwis.
But the problem is that, even though about 440,000 of these ordinary Kiwis had a think about buying the last power company the Government was trying to sell, only about one-in-four of them actually did so. At least some of whom were hardly your stereotypical "Mum and Dad investors". And, as noted above, those that did so have seen the value of their Mighty River Power investment drop by over 10% since then.
So the Government has to face up to the horrible question: what if we try to sell Meridian, and no-one wants to buy it? Or, rather, no ordinary Kiwis, to whom we have to sell it to if we are to avoid appearing to hawk off the country's silver to big business and rich foreigners, wants to buy it?
Hence - every possible incentive dangled before the eyes of individuals who may have been feeling burnt by the Government's last "too good to miss!" offer. All paid for, of course, with the money of those New Zealanders who can't pull together the few thousand dollars necessary to buy a ticket aboard this particular gravy train.