Tuesday, October 12, 2010

Origin Energy asset stripping Contact Energy

Just doing a little bit of research on something else when I got sidetracked by Contact Energy Ltd [CEN.NZX] and it relationship with its ASX listed majority shareholder Origin Energy Ltd [ORG.ASX].

From the financial figures that one can glean from a Thompson First Call research report, one can see that the relationship between the two is one of the master siphoning all the good stuff out of its little cousin.

The reasons for this are rather nasty, deceitful and give the middle finger to minority Contact Energy shareholders.

If we look at the peak profit for the company in the 2005-2008 period of between $281 - $237 million we can see dividend payouts ranging from 18c to 28c per share, but as profit dropped to $118 million in 2009 and $155 million in 2010 the dividend soared to 45c. (see chart below)

Of course Origin, with a 51% stake in Contact gets the majority share of the dividend payout.

Yes I know, as a majority owner Origin are entitled to take this dividend but why would they double it without a corresponding surge in profit?

Well, Origin have made a couple of cheapskate attempts at taking full control of Contact but they couldn't get agreement from minority shareholders on a price. Origin offered lowball figures undervaluing their target and the two attempts ended up floundering in a pool of bad feelings and finger pointing.

Origin are still interested in taking full control of Contact but they do not want to pay full market value (over $10 bucks by my estimation) and who does, so why not try milking the cow until its cash udder becomes so depleted minority shareholders will be begging for Origin to make them an offer.

Just look at Contact's long term debt levels. Surging from $514 million in 2007 to $1279 million in 2010, close to $200 million alone has been added since 2009.

A lot of this debt has been used to develop generation capacity but why would you continue to borrow just to pay massive dividends?

It just doesn't add up.

Contact CEO David Baldwin was appointed by Origin and he has been able to manage the company to Origin's advantage and clearly to the long-term disadvantage of minority shareholders. He has received big bonuses regardless of his company's poor performance.

The share price has been pretty much stagnant for the last 2 years and this is the result of poor performance and a shocker move by Mr Baldwin in 2008 that lost 40,000 customers for the company and led to a plateau in customer numbers that are fixed around the 600,000 mark.

The way Origin are managing Contact is a loser long-term. There is only so long you can milk the company of cash, pile on debt and have the share price stay at current levels.

All indications though are that this is what Origin are doing and they are doing it for cynical reasons.

They want Contact Energy on the cheap.

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