Energy Australia rejig will show Tru bottom line

TRUenergy, owned by Hong Kong's CLP Holdings, has reportedly begun the search for investment banks to manage the public offering of up to 49 per cent of the company, so the re-branding is not surprising.

Energy Australia is the retail business bought a year ago from the NSW government in a $2.2 billion deal that more than doubled its revenue and earnings from downstream operations.

It is hardly surprising CLP would want to ditch the TRUenergy brand, a legacy of previous owner TXU Corp, in favour of something that covers the full scope of its business, from coal seam gas and wind power generation through traditional coal generators and on to the meter boxes of homes and businesses.

It is also not a shock that if it is going with that name it wants to drop the old "fishing net" logo of Energy Australia in favour of something a little zippier although it seems to be torn between a stylised letter "e" and an eight-point star.

Sadly, though, the entity in CLP's Australian corporate chain that controls the businesses, TRUenergy Holdings, barely made a buck last year on its nearly $7 billion of turnover. Its net profit was $11.25 million for calendar 2011, according to accounts filed with ASIC.

While TRUenergy did not earn enough to pay a dividend to its Hong kong-listed parent, it did pre-pay $100 million in shareholder loans at the end of March. The profit was made worse by a disproportionately high $57 million tax bill on earnings of $68.3 million, which is treble the normal 30 per cent corporate rate due to some undeductible expenses.

Once you add back the $350 million slashed from its bottom line as a post-carbon tax impairment charge against the value of the Yallourn power station in Victoria and some $238 million in interest charges, TRUenergy's performance becomes much more respectable.

Make those adjustments and earnings before interest and tax in 2011 were nearer $600 million in a "normal" year, which, if the reports of it wanting $3 billion for a shade under half the company are true, means it is being priced on an EBIT multiple of about 10 times historical earnings seemingly pretty high.

Insider suspects, though, that with the full consolidation of the Energy Australia business in 2012, and no doubt significant cost savings as it eliminates duplication, there ought to be some widening in profit margins. Bearing down on that, though, will be the effects of higher power costs, which are not just borne by consumers.

If and when TRUenergy does come to market, one thing investors might want to watch is its defined benefit superannuation scheme

BETTER, M2

M2 Telecommunications' $83 million renounceable issue to funds its $192 million acquisition of Primus Telecom Holdings will be worth watching on several fronts not least of which will be the behaviour of its largest shareholders.

M2's decision to give investors the chance to sell their rights to help fund buying new shares was explained by chief executive Geoff Horth as designed "to recognise all shareholders equally ... There has been a bit of criticism recently of institutional placements or other equity raising models".

Horth is right, with Insider and others criticising the "accelerated entitlement" issue format used by most large companies to ensure they get their money faster and, hopefully, cheaper, than an underwritten raising that gives smaller investors a chance to at least realise the value of their rights.

On that basis, M2's decision is welcomed. Directors of the company said they would take up the issue to the best of their individual ability.

The family of Horth's predecessor, and the company's former driving force Vaughan Bowen, owns close to 15 per cent of M2 which would mean a bill of close to $12.5 million if they elect to take up their full share of the deal. Long-time investor in telcos Phil Cornish has been a supporter of Bowen, although his investment company lightened its load by almost 2 million shares in mid-December which most probably realised about $6 million.

That will work out nicely if it banked the money, because Cornish Investments still has 8.2 million shares (6.5 per cent of the company), and the 1-for-4 issue would cost it $5.5 million to fully support.

With the offer priced at $2.66 for each new share, compared with $3.49 before the announcement, the discount is steep but unsurprising in the context of how the Primus acquisition fundamentally changes M2's structure and balance sheet.

Uptake by retail investors will not only be a test of M2 and its business judgment, but of the likelihood of other companies opting for renounceable issues. Manager and underwriter Goldman Sachs will also be keenly interested in how many shares need to find a home.

It is a brave deal for M2, given that it near doubles the size of the company and lifts its debt from around $26 million to $138 million, but does not seem to give a wholesale leap in earnings per share. If a note from Moelis Research yesterday is a guide to market views, then Horth and his team have some selling to do.

"Whilst the Primus purchase does make MTU a considerably larger operator within the domestic telecommunications sector it does seem like a lot of effort for <10% EPS accretion after synergy benefits are achieved as such although MTU offers exposure to the business telco sector we do see risks associated with the acquisition not compensated for by the purchase price, and so have downgraded our recommendation to Hold," Moelis said.

Investors should note that while M2 has said that it "aims to maintain" its policy of paying 70 per cent of net profit as dividend, that is not a commitment. The company also said that it would look at using surplus cash to reduce the debt faster which means a delicate balancing of lowering borrowing costs with distributions to shareholders.

insider@fairfaxmedia.com.au