30/11/2016 - 15:21

The devil is in the detail

30/11/2016 - 15:21


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At last, after months of chewing it over, the state government has announced a plan to divest Western Power.

At last, after months of chewing it over, the state government has announced a plan to divest Western Power.

It follows the NSW government’s announcement in October that it would to sell 50.4 per cent of its electricity distribution network, Ausgrid, to Australian Super and IFM Investors.

That deal raised $16.2 billion, comprising approximately $6 billion for the 50.4 per cent of the equity plus the assumption of $10 billion of debt by the new investment vehicle.

In the case of Western Power, $8 billion of debt will be removed from the state government’s balance sheet, and it will receive about $3 billion for the 51 per cent equity interest it will sell to investors, implying an enterprise value of $14 billion. That is consistent with the valuations suggested by the government in the past.

Although the $8 billion reduction in state debt is welcome, debt will now peak at $32 billion instead of $40 billion, so there is more work to be done on assets sales if the next government is going to have the funds available for infrastructure investment.

While there is almost universal agreement the world will be in a low interest environment for some years, history shows that such widely (and logically) held beliefs can be shattered in a very short time. If interest rates were, for whatever reason, to lurch upwards, it would have a serious impact on the state’s finances if the current levels of debt are maintained.

The Labor Party is against the IPO but has yet to explain how it will deal with the state’s debt, which, while not of its making, will become its responsibility should it win government.

Many details of the IPO are sketchy and will no doubt be fleshed out in the coming weeks. Will the current board and management remain in place? Will the government have any ongoing say in the appointment of the directors or Western Power’s strategy?

Investors will need to know that the enterprise will be run efficiently. Their interests are not the same as the interests of employees or consumers – which the Australian Services Union WA Branch secretary, Wayne Wood, pointed out when he said the IPO is an attempt to spin privatisation as a positive thing.

While many large super funds are partly controlled by unions, those funds are run for the benefit of their superannuation fund members. This means that they seek economic returns from their investments in the same way as any investor or corporation.

Which begs the question – why not just sell Western Power? It is a very small business by industry standards, and the government and consumers may be better served by a larger operator bringing its expertise to the business, rather than a post-IPO Western Power running in business-as-usual mode.

It is difficult to see what future Western Power will have as a listed company. Is it to become some kind of yield stock, with the government using its stake to block takeovers? That will not make for happy shareholders.

Or will it go on an acquisition spree as Alinta Energy did after its IPO, which will ultimately mean the government’s shareholding is diluted? That’s the scary option.

The reality is that its ultimate future is either as an acquisition for a larger energy business or a privatisation into an infrastructure fund. So why not just do that now?

The announcement of the IPO has put a price on the business and the government has made clear its intent to sell. When it starts getting approaches to buy the business, it should consider them very seriously.

• Simon Withers is a former investment banker.


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