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Z defends Flick purchase after investor criticism

Z Energy says its $46 million purchase of Flick Electric is a good deal, despite the Wellington broker and Z investor Woodward Partners dissing it.

In a note to clients earlier this week, Woodward’s director and energy analyst John Kidd questioned the amount Z paid and said he saw no clear path to a material return on the (substantial) investment.

"Synergies between the businesses are not obvious and if there are any, the deal value would appear as though Z has paid for (rather than realised) the benefit of those synergies," Kidd said.

But Z says Kidd is comparing the Flick purchase with standard “cost per customer” electricity company deals, such as when Trustpower bought remaining shares in King Country Energy earlier this year.

“We considered building [an electricity retail business] from scratch, but we don’t believe we could do a better job than Flick has done.”

- Z GM Lindis Jones

The deals are different, says Z Energy general manager corporate Lindis Jones.

He says $15.6 million of the purchase price recognises the growth potential in the electricity retail sector.

“We’ve not just bought 70 percent of the shares in a company that has customers, but we’ve put cash into a business that is capable of growth, in order to grow the business.”

The rise in use of electric vehicles could boost consumption 5-10 percent a year “towards the back end of the next decade”, Jones says, though actual numbers will depend on how fast people move away from petrol cars and any government push on a carbon zero strategy.

“We considered building [an electricity retail business] from scratch, but we don’t believe we could do a better job than Flick has done.”

"Synergies between the businesses are not obvious and if there are any, the deal value would appear as though Z has paid for (rather than realised) the benefit of those synergies."

Woodward Partners director John Kidd 

Woodward isn’t the only investor questioning the Z-Flick tie-up.

Z shares have fallen steeply since the announcement. Having closed at $7.40 a share the Friday before the August 27 deal, they dropped to $7.29 on the day the tie-up was announced and got as low as $7.05 earlier this week, before recovering to $7.10 at the close of trading yesterday.

Kidd described the investment as "an outstanding outcome for Flick investors, with a six-fold return on early money achieved over a four-to-five year timeframe".

On the other hand, “[it] leaves us much less convinced as a Z investor".

Flick began operations in 2013, using smart metering technology that charges customers the wholesale price of electricity - plus an administrative and profit margin that Kidd says comes in around 15 percent. Customers accept their power bills will fluctuate with wholesale market conditions and have largely benefited from historically low wholesale electricity prices over the last six years - a period in which there has been excess electricity supply and very little growth in national demand for electricity.

Five years on, Flick has around 24,000 customers, according to Electricity Authority figures, making it a minnow in a market where the largest retailer, Genesis Energy, has more than 520,000 customers.

Z says the purchase is part of its three-part “What is Next?” response to the long-term trend away from the use of fossil fuels:

- future fuels;

-  mobility (changing transport patterns);

- making better use of its retail network.

As part of the strategy, the country's biggest fuel retailer has invested $250,000 in Wellington-based electric car-sharing start-up Mevo, and is running a parcel collection trial with New Zealand Post at 10 service stations in Auckland, Wellington and Christchurch. Some 80 percent of New Zealand's population live within five kilometres of a Z-owned site, the company says. It is also building a biofuels plant in Auckland, but has so far not succeeded in getting the technology to work reliably.

Jones says the Flick purchases ticks the box in the first two 'What is Next' categories. The next step is for the companies to work on how to achieve synergies between the two brands, he says. Although there’s no move to rebrand Flick as Z, there is an opportunity to sell Flick Electric products to the Z customer base.

“Flick and Z have put some of our best and brightest people in a room for 90 days to think about how we can apply Z’s assets, reach and scale to a business that only has 1 percent of the retail market.”

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