Brian Gaynor: Overseas ownership is holding NZ back

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A low savings rate is part of the reason  our control of listed firms is wearing thin. Photo / Richard Robinson
A low savings rate is part of the reason our control of listed firms is wearing thin. Photo / Richard Robinson

The NZ sharemarket had little overseas influence in the early 1980s. Another week and yet another report clearly telling us we have too much debt and investment in existing residential property and too little savings and investment in the productive sector.

The latest report is the 167-page OECD 2011 Economic Survey of New Zealand. The report's overview contains a graph showing the gap between Australia, the United States and New Zealand which continues to widen because Australia has achieved real GDP growth of 238 per cent since 1970, the United States 212 per cent while we have lagged behind with just 146 per cent.

To understand how a low savings rate translates into below-average economic growth we have to look at the domestic sharemarket and the ownership structure of our productive sector over the past 30 years.

The table shows the level of successful takeover activity on the NZX since 1981 divided into six five-year periods.

The New Zealand sharemarket had little overseas influence in the early 1980s as we attracted almost no overseas portfolio investors, although a number of listed companies had majority overseas shareholders.

These NZX companies included ANZ Banking Group (New Zealand), 75 per cent owned by its Australian parent, Alcan NZ, Dunlop NZ, Firestone NZ and ICI NZ.

Most of the takeover activity in the 1980s involved either one New Zealand company, notably Brierley Investments, acquiring another domestic company or a multinational purchasing the minority shareholding in its NZX listed subsidiary.

The situation changed dramatically in the late 1980s and early 1990s for two main reasons:

Domestic investors were devastated by the 1987 sharemarket crash and deserted the NZX for residential property.

Our politicians, beginning with Roger Douglas and Richard Prebble, sold a large number of the country's strategic assets to overseas investors.

These politicians failed to realise they were establishing a domestic wealth destruction culture as wealth is mainly created through ownership rather than disposal. Bill Gates and Warren Buffet, who maintain substantial shareholdings in Microsoft and Berkshire Hathaway respectively, are good examples of this and the Australian Government also realised the importance of domestic ownership as the majority of its assets were sold to Australian investors through sharemarket floats.

Telecom was sold to overseas interests for $4.25 billion in 1990 and since then has made distributions to shareholders, in the form of dividends and capital repayments, of $14.6 billion.

Although the original United States shareholders partially sold their stakes through a sharemarket IPO, an estimated $8.8 billion of these $14.6 billion distributions went to overseas shareholders. This represents a huge transfer of wealth from New Zealand to overseas investors and the loss of capital that could have been reinvested in other New Zealand productive enterprises.

These figures do not include the huge capital profits realised by the original United States investors when they sold their Telecom stakes. A similar scenario has occurred with many of the other overseas sales, including the banks.

The Bank of New Zealand was sold to National Australia Bank (NAB) for $1.5 billion in 1992. Since then BNZ has distributed $5.2 billion in dividends to its Australian parent and is now worth an estimated $7.2 billion based on its 2010 net earnings of $602 million and a price/earnings ratio of 12.

Thus NAB paid $1.5 billion for BNZ and the latter has delivered total shareholder value of $12.4 billion to its Australian owners since late 1992.

But this issue is about much more than the loss of shareholder wealth.

Most of the largest overseas-owned organisations, including the banks, now have foreign chief executives. This reduces the job opportunities and salary potential of New Zealanders.

Overseas owners are also unlikely to encourage their New Zealand operations to adopt an overseas growth strategy. NAB would never allow BNZ to expand in Asia if the Australian company could take advantage of these opportunities itself.

In addition, overseas owners often transfer assets out of New Zealand at low prices so they can capture more value in their overseas operations. This was illustrated in last week's column, which compared the potential sale of the Crafar farms with recent developments in the New Zealand forestry sector.

More importantly, many owners of New Zealand companies, including Fonterra, are reluctant to raise new capital through a stock exchange listing because they believe New Zealand investors will accept low-ball offers from overseas interests as soon as they experience an earnings slump and share price decline.

Thus if our major companies have restricted growth opportunities under foreign ownership then the New Zealand economy has limited growth opportunities.

Successful takeovers by overseas acquirers, as a percentage of total takeovers, increased in the 1990s and 2000s although the figures in the accompanying table understate the true situation. There are a number of reasons for this, including:

Overseas controlling stakes in Contact Energy, Metlifecare, Millennium & Copthorne Hotels, NZ Farming Systems Uruguay, PGG Wrightson and Sky Network TV are not included in the table.

The sale of INL's newspaper assets and Fletcher Forests' forest assets are not included as these firms were not technically taken over.

A number of companies, including Goodman (which had acquired Wattie) and Brierley Investments, have moved overseas and are also not included in the table.

The overall effect of our shortage of savings and inability to take a long-term view of asset ownership, has had a devastating impact on the NZX and has hindered the country's economic growth.

The total value of listed NZX companies was just $56 billion at the end of last year compared with $18 billion at the end of 1985 while the total value of Australian listed companies exploded from A$85 billion to A$1419 billion over the same 25-year period.

A prosperous free enterprise economy is based on a high domestic savings rate and a strong productive sector that is well governed and mainly domestically owned.

Australia and other above-average growth countries have these characteristics but New Zealand doesn't.

Our low savings rate and under-investment in productive assets have hindered long-term stability and growth.

For example, almost all the assets owned by the 10 largest ASX listed companies at the end of 1987, which had BHP in the top spot and Westpac at number 10, are still Australian-owned, whereas our largest listed companies at the end of 1987 were as follows: Fletcher Challenge (paper, forest and energy assets in foreign ownership), Brierley Investments, NZI (Australian-owned), NZ Forest Products (Graeme Hart-owned), Bank of New Zealand, Petrocorp (bought by Fletcher Challenge and on-sold to overseas interests), Lion (Japanese-owned), Carter Holt Harvey (Graeme Hart), LD Nathan (merged with Lion and now Japanese-owned) and Robt Jones Investments (Hong Kong-owned).

Almost all of the assets owned by the next 10 largest NZX companies in December 1987, with the notable exception of the pre-split Fisher & Paykel, are also overseas-owned. These include Magnum (with its major operations Dominion Breweries and Countdown supermarkets now foreign-owned), Progressive Enterprises (Australian-owned), Wilson & Horton (Australian-owned) and INL (assets sold to Fairfax).

The latest OECD report has a number of clear recommendations for New Zealand - particularly policies that make financial assets as attractive as residential property from a tax point of view - but our political leaders continue to put this issue in the too hard basket.

What is the point of politicians talking about bridging the widening gap with Australia when they are unprepared to make the tough decisions that would achieve this?

Brian Gaynor is an executive director of Milford Asset Management.

bgaynor@milfordasset.com

- NZ Herald

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