Origin chairman Kevin McCann said the two companies would be an excellent fit.
“They have similar business strategies, complementary assets and skills, generate strong and predictable cash flows and in both cases have a successful track record of performance and growth,” McCann said.
“The merger will bring additional skills and strength to both companies, with Origin bringing exploration and production expertise and Contact providing strong generation experience.”
Contact deputy chairman Phil Pryke today said Origin – a 51.4% owner of Contact – had approached the Wellington-headquartered company late last year to discuss merger options.
"We have closely examined the proposal to merge and believe that combining the businesses is the best way to create additional value for Contact Energy shareholders."
The independent directors – Pryke, Tim Saunders and John Milne – had engaged First New Zealand Capital to conduct an independent appraisal of the merger proposal for Contact shareholders and more detailed information was expected by late April-early May, Pryke said.
Origin managing director Grant King, who will be managing director of the merged company, said the merger would create an Australasian player with the biggest single exploration and production portfolio in New Zealand, which would be “truly great”.
The NZ$8 billion energy giant would have projected earnings before interest, tax, depreciation and amortisation (EBITDA) of over NZ$1 billion per annum.
The merger will occur by way of a dual-listed company (DLC) structure run by a common board and unified senior management team. This will enable the companies to be run effectively as one business – to be known as ContactOrigin – if approved, from July.
Contact Energy and Origin Energy will retain their separate legal identities and maintain their individual stock exchange listings.
Pryke said Contact was an important part of the share portfolios of many New Zealand investors who have been loyal to the company over a number of years.
“This merger proposal allows them to gain access to a much greater range of opportunities through Origin Energy,” he said.
The DLC form of the merger would allow Contact shareholders to invest in an Australasian business by holding shares in a New Zealand listed company, thereby retaining the benefits of a primary stock exchange listing and dividend imputation.
Contact minority shareholders, who hold 48.6% of Contact, will own 24.3% of the merged business. Origin Energy shareholders will hold the remaining 75.7% of the merged business, according to Pryke.
"We believe that combining the businesses will eliminate inefficiencies under the current ownership structure,” he said.
“The merger will create a stronger competitive position for the businesses both in New Zealand and in Australia and will help manage some significant strategic challenges faced by Contact.”
A key issue for Contact was securing long-term fuel supply for its current and proposed gas-fired power stations.
“This merger strengthens the capacity to find and secure additional gas resources by giving us direct access to Origin's exploration and production expertise. The two companies combined currently hold more exploration acreage in New Zealand than any other company," Pryke said.
"The merged businesses will also have greater financial strength to exploit a greater range of opportunities than would have been available under the current two-company structure."
Once merged, the ContactOrigin board will comprise the current Origin directors and the independent Contact directors. Origin chairman Kevin McCann would chair the board, with Pryke, deputy chairman.
King will be managing director of ContactOrigin and the to-be-appointed Contact chief executive would become part of the executive management team and report to King.
In New Zealand, approvals for the proposal are required from the Takeovers Panel, the NZX and the Overseas Investment Office. The Scheme of Arrangement for the merger will then be submitted to the High Court. The proposal also requires approval by Origin Energy shareholders and the Foreign Investment Review Board in Australia.
The NZX suspended trading in Contact Shares this morning prior to the announcements and resumed trading later in the day.
In addition, Contact Energy chief executive David Hunt today announced his resignation.
"Although the timing of my decision coincides with the announcement of the proposed merger between Contact and Origin, my choice is entirely motivated by personal reasons," he said.
Hunt said that when he raised his intention to resign with Contact board members they made it clear he would be offered an opportunity to manage the New Zealand end of the merged business. But he decided he wanted a new career direction and so tendered his resignation.
"Compared with the status quo, the proposed merger has the potential to yield worthwhile benefits to the group over time, especially by aligning the companies' activities and interests in the NZ upstream sector."
King said Hunt had made an outstanding contribution to the development and growth of Contact over the last 10 years, reflected most recently in his appointment as chief executive.
"The board had hoped David would continue in this role but respects his decision, and has initiated a process for appointing a successor."
Hunt will continue in his current role for an undefined period to assist with the transition to a new chief executive.
