(Bloomberg) -- New Zealand power company Contact Energy has agreed to buy smaller rival Manawa Energy to create a business better able to develop the new generation the South Pacific nation requires.

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Contact announced a shares-and-cash deal Wednesday in Wellington that values Manawa at NZ$1.86 billion ($1.1 billion) or NZ$5.95 a share, a big premium on yesterday’s closing price of NZ$4.03. Manawa shares surged as much as 40% today and were at NZ$5.31 at 11 a.m. local time.

The amalgamation comes as the electricity industry faces calls for change to address a lack of competition and investment that critics say has contributed to a surge in wholesale power prices. Winstone Pulp International announced yesterday it will close its two New Zealand mills partly because rising energy costs made them uncompetitive.

Contact, which owns hydro plants in the South Island, will add 25 more from Manawa’s portfolio creating geographical diversification and resilience against dry year risk, Chief Executive Officer Mike Fuge said. In turn that will allow it to sell larger volumes of fixed-price electricity into the market, he said.

“Access to this type of hedging adds resilience and support for New Zealand’s large energy users and independent retailers to reduce their exposure to spot market prices in dry years,” Fuge said. “This transaction makes a lot of sense given the strong alignment with the needs of our customers and the wider economy.”

Contact will also get access to a portfolio of future wind and solar power developments within Manawa of more than 1,200 megawatts, it said. This will sit alongside its own portfolio of renewable generation projects including geothermal.

“The combination is an important step for the New Zealand energy market and energy transition, providing greater ability to invest in future generation capacity, enhancing market security and ultimately contributing to reducing wholesale prices long-term,” Chair Rob McDonald said.

The deal is subject to approval from antitrust regulator the Commerce Commission and shareholders.

Infratil, which owns 51% of Manawa, said it will support the proposal subject to certain conditions, and will hold about 9.5% of Contact on completion. The local Tauranga community trust, which owns 27% of Manawa, will also back the deal.



Contact said the purchase is “financially compelling” and will boost earnings and lead to higher dividends starting in the year ending June 2026, although it faces initial transaction costs in the current financial year. The stock dropped 1.9% to NZ$8.29.

(Updates with stock surge in second paragraph)

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