5 Jul 2013

Powerco tipped to try to takeover smaller lines companies

8:22 am on 5 July 2013

It looks likely that Powerco will flex its muscles and try to takeover smaller lines companies in the future, now that AMP Capital, Australasia's largest fund manager, has agreed to purchase a stake.

But it may not be that easy.

AMP Capital says it sees opportunities for expansion of the Powerco business and consolidation of the lines industry.

The investment manager has reached an agreement to buy a 42% stake in New Zealand's second largest electricity and gas distribution company from the Canada-based Brookfield Infrastructure for $525 million.

The other 58% of Powerco is owned by Queensland-based investment manager QIC.

AMP Infrastructure Equity Fund fund manager Michael Cummings said it was a good time to invest in the asset now that regulatory certainty around both sides of Powerco's business has been set.

He said Powerco operates in key growth areas and is very well managed, and fits its risk and return criteria that investors are looking for.

Mr Cummings said there is organic growth through population expansion in Bay of Plenty, Taranaki, Wellington, Palmerston North and Hawke's Bay.

With the large number of smaller lines companies in New Zealand, he said AMP Capital sees the opportunity for consolidation in the future and with the expertise that Powerco brings there will be opportunities for further expansion.

Mr Cummings said one of the attractive features of Powerco is its geographic diversity which helps to mitigate the volatility of differing growth rates in different regions.

Forsyth Barr senior equity analyst Andrew Harvey-Green said the price paid for Powerco doesn't look unreasonable when compared to what another lines company, Vector, is trading at.

And he thinks consolidation in the industry will be challenging to achieve because a lot of the smaller lines companies are owned or operated by trusts, consumer groups or the like and so far none of them have been willing to merge.

"I think the most recent activity we saw was Marlborough Lines Company looking to takeover Horizon Energy and that got resisted."