Pachydro Bid Gains Approval

Sydney Morning Herald

Wednesday May 25, 2005

Rod Myer

Pacific Hydro shareholders should take the money and run by accepting Industry Funds Management's $5-a-share bid for the renewable energy group, in the absence of a stronger bid elsewhere, PacHydro chairman Bernard Wheelahan said in a letter accompanying the company's target's statement.

The statement emphasised the premium incorporated in its offer by comparing it with broker recommendations made before the recent bidding war for PacHydro began.

Before the announcement in October of the strategic review of the ownership of the company, the average price recommendation from five major brokers was $3.41, or 46.9 per cent below IFM's offer price.

By the time Acciona launched the bidding war for PacHydro in March with a $4.50 offer, the broker recommendations had risen to $3.83, still 30.5 per cent below IFM's latest offer.

The target's statement also noted that IFM's financial strength might enable it to develop PacHydro's large pipeline of renewable assets more quickly than the current structure.

The statement said PacHydro was unlikely to be able to develop all its Australian projects unless the Government increased its mandatory renewable energy target.

And in the absence of such an increase, other players would be competing with PacHydro to complete projects before the subsidy for the renewable energy target runs out late next year.

PacHydro's statement said IFM's strong and consistent inflow of superannuation funds and its lack of a requirement to pay cash dividends gave it a better structure to fund development plans than PacHydro had at present.

Given that IFM was a long-term shareholder in PacHydro, with 32 per cent of the company, it was likely to get to its 50.1 per cent minimum acceptance level, the target's statement said.

It said PacHydro's valuation in the international markets might be affected by two recent events. Carbon credits in the European market spawned by the implementation of the Kyoto Protocol earlier this year have recently jumped in price.

The credits started trading at about ##9 ($22) in March and are now trading at ##18.50. That theoretically boosts the value of carbon credits that can be sold on world markets from PacHydro's operations outside of Australia.

When carbon credits were at lower prices PacHydro estimated they could provide as much as $29 million in extra income for the group.

On the negative side, some German renewable energy stocks declined by up to 20 per cent following gains by conservative parties in German regional elections last weekend.

The markets feared that if those gains were reflected nationally then nuclear power would gain at the expense of renewable energy.

PacHydro shares fell 5c to $5.10 yesterday.