TRUenergy burns midnight oil on rebrand

A CONFIDENT TRUenergy has begun registering designs for logos to support its relaunch as EnergyAustralia as part of its expected $3 billion float later this year.

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 rebranding exercise is not surprising.

EnergyAustralia is the retail business bought a year ago from the New South Wales government in a $2.2 billion deal that more than doubled TRUenergy's revenue and earnings from downstream operations.

It is hardly surprising that CLP wants 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 no shock that if it is going with that name it wants to drop the old ''fishing net'' logo of EnergyAustralia in favour of something a little zippier - although it seems to be torn between a stylised letter ''e'' and an eight-pointed 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. Net profit was a measly $11.25 million for calendar 2011, according to accounts recently filed with the Australian Securities and Investments Commission.

While TRUenergy clearly 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, 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 and $238 million in interest charges, TRUenergy's performance becomes more respectable.

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

Insider suspects, though, that with the full consolidation of the EnergyAustralia business in 2012, and no doubt big 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 may want to keep their eye on is its defined benefit superannuation scheme.

M2 on telco superhighwayM2 TELECOMMUNICATIONS' $83 million renounceable issue to fund its $192 million acquisition of Primus Telecom Holdings will be worth watching on several fronts - not the 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'' issues most large companies use to ensure they get their money faster and, they hope, 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. M2 directors said they would take up the issue to the best of their individual ability.

The family of Horth's predecessor and former driving force, Vaughan Bowen, owns close to 15 per cent of M2 - which would mean a bill of $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 support fully.

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 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 $26 million to $138 million but does not seem to give a wholesale leap in earnings per share (EPS).

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 [M2] a considerably larger operator within the domestic telecommunications sector, it does seem like a lot of effort for [less than 10 per cent EPS] accretion after synergy benefits are achieved as such although [M2] 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','' said Moelis.

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

insider@fairfaxmedia.com.au