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A Broker's PreView - Infratil Empty Their Z Energy Tank

Overview: Z Energy investors have had a wild ride over the past few weeks. The share price was pumping for a while, rising 10 percent after an update on their Chevron acquisition. The high octane upswing didn’t last, with the share price dropping considerably after significant shareholders Infratil and the New Zealand Superannuation Fund sold 20 and 10 percent respectively. The shares were sold at $6 a piece, a 10 percent discount to the closing price on Tuesday, before the announcement.

Pros: The rise in the share price in the lead up to the sell down occurred after Z Energy announced a $9 million reduction in expected transition costs, and improved expectations of the synergies they can achieve through the acquisition.

All of these factors make the $785 million acquisition price of look even more astute from Z Energy’s perspective. The two companies obviously have many complimentary assets as judged by the synergy benefits of $25 - $30 million. Together they will boast approximately 49 percent of the New Zealand retail fuel market.

Cons: Is a 49 percent market share too much? That is the question that the Commerce Commission will answer on the 18th of December. The key principle that the Commission will look at is whether this deal will “substantially reduce competition in the market.”

The Commission will look at whether the merged entity has a high market share, whether there are substantial barriers to new competition, whether the merged entity has price dictating power and whether the merged entity makes the industry more susceptible to coordination on prices.

Z Energy recently noted that they are “confident the transaction will not substantially lessen competition.” They, and investors, will be hoping the Commerce Commission agrees.

Price performance: The share price spiked to all time highs of $6.68 on Tuesday before the Infratil and Super Fund sell down (which went through at $6). When shares started trading again on Thursday, the share price dropped below the $6 price almost straight away.

Investment outlook: A lot rides on the Commerce Commission December decision. Their holding in NZ Refining also poses risks as refining margins are volatile. A dividend yield north of 6 percent will attract some investors.

Grant Davies
Investment Advisor
Phone: 03 353 0795
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*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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