TUCKED away in the voluminous documents relating to BIP's...

TUCKED away in the voluminous documents relating to BIP's proposed $1.6bn takeover of Prime is the disclosure that Prime may be forced to sell its 58 per cent stake in Powerco.

Which is interesting, because Prime, formerly Babcock & Brown Infrastructure (BBI), has made no such disclosure to the ASX.

Powerco is New Zealand's second-largest provider of regulated electricity and gas.

QIC acquired a 58 per cent in Powerco in March last year for $NZ423m.

Prime's remaining 42 per cent is governed by a shareholders' agreement which, among other things, contains change of control provisions.

The acquisition of Prime by Brookfield would represent a change of control, and requires the consent of QIC.

Such consent must be given if, in QIC's reasonable opinion, BIP satisfies certain criteria set out in the shareholder's agreement.

If QIC is not satisfied the criteria has been met, it has an option to acquire Prime's 42 per cent interest in Powerco at an agreed price or, if agreement cannot be reached, at fair market value as determined by an independent expert.

QIC has issued Prime with a notice that it does not consider BIP meets the criteria set out in the shareholders' agreement.

Prime has reserved its right to dispute the validity of the notice. Moreover, Prime has issued a formal deadlock notice to QIC.

That relates to other provisions in the shareholders' agreement. If the directors of Powerco cannot agree on certain matters at two successive board meetings, then either party can issue a deadlock notice.

If the disputed matters are of an operational nature that can trigger "expert determination", but if they relate to non-operational matters, it can set in process a mechanism whereby 100 per cent of Powerco must be sold via a process administered by an independent financial adviser.

Although the Powerco board is yet to determine the nature of the matters in dispute, Prime considers they are non-operational which, if correct, would set the sale process in motion.

However, Prime and QIC have agreed to suspend the change of control procedure and deadlock process and have begun discussions regarding the possible sale ot QIC or Prime's 42 per cent stake in Powerco or, alternatively, the purchase by QIC of a further 8 per cent of Powerco, which take its stake to 66 per cent.

If agreement is reached the price is expected to reflect fair market value.

The independent expert, Grant Samuel, has valued Prime in a range of $1.53bn to $1.92bn, of which its utilities operations account for $599.5m to $731m.

Within the utilities operations, Prime's 42 per cent stake in Powerco accounts for $267.9m to $300.4m of that value range.

Grant Samuel says the value attributed to Powerco was an overall judgment having regard to multiples of EBITDA, multiples of RAB (regulated asset base) and DCF analysis, with the primary focus on EBITDA multiples.

On Grant Samuel's valuations the Powerco stake accounts for between 15 per cent and 17.5 per cent of Prime's assets. The potential forced sale of that stake arguably is a material price-sensitive matter which should require disclosure.