Owen Hembry

Owen Hembry is the business news editor of the New Zealand Herald

SOE Profile: Market wary of any Air NZ share offer

The difference between the Crown owning 51 per cent or 73 per cent of Air New Zealand has been described as barely noticeable at an operational level. Photo / Mark Mitchell
The difference between the Crown owning 51 per cent or 73 per cent of Air New Zealand has been described as barely noticeable at an operational level. Photo / Mark Mitchell

Ten years after the Crown saved Air New Zealand, this Government is looking to cut by nearly a third its stake in the national carrier.

The Crown owns most of the shares in the NZ-listed airline. The potential sell-down is part of an asset sale plan that aims to raise billions for Treasury coffers.

Prime Minister John Key in January unveiled plans to reduce the Government's stake in the airline from 73.4 per cent to 51 per cent, which alongside the sale of minority holdings in Mighty River Power, Meridian, Genesis and Solid Energy is hoped to raise $5 to $7 billion.

Key said the money could be reinvested in other assets and help reduce the country's reliance on debt.

Labour leader Phil Goff accuses the Government of using shonky accounting to justify a policy to hock off valuable assets.

And the voting public appears nervous - a Herald-DigiPoll survey in May showed 62.6 per cent disapproved of the asset sale policy.

As Rugby World Cup fever cools down and the election heats up, selling off the family silver looks set to become a divisive issue.

Market commentator Arthur Lim said selling down Air New Zealand stock would be a tough ask with investors wary of airlines.

"If we look at the history of airlines in general, but Air New Zealand in particular, it hasn't been a happy investing ground has it?" Lim said. "More airlines have actually gone broke over the decades than new airlines have been set up."

The Crown stepped in to save Air New Zealand in 2001 - investing $1 billion after the company was swamped by losses from its investment in the failed airline Ansett.

"In recent times we've seen airlines in Europe, Canada, Japan all fallen on very hard times and I think a big part of the reason is that the airline business' profitability and operations are impacted by a whole set of external factors beyond the control of the airlines," Lim said.

"Things like fuel price, which is their single biggest operating cost, and in recent decades deregulation or reregulation."

The International Air Transport Association last month said that despite stronger-than-expected growth in passenger markets in September the industry was bracing for hard times. It expects profitability to drop from US$6.9 billion ($8.68 billion) this year to US$4.9 billion next year.

Airlines were not considered businesses for the faint-hearted, Lim said.

"I think [mum and dad investors] need to think very carefully on something like Air New Zealand."

The airline industry lent itself to state ownership. "Because you need that longer-term investment horizon, a broader viewpoint, very, very deep pockets to see the airline through its periods of volatility."

Air New Zealand was a well-run airline, he said.

"I think the fact that it is going to be Government-owned gives it additional credibility and strength. But having said all that, I think that the nature of the airline industry would make Air New Zealand a hard sell."

Airlines also lent themselves more to cyclical investors, which the Government should take into consideration, Lim said.

"Certainly now or in the next 12 months I wouldn't expect would be a good time for the Government to sell down to obtain optimum value."

Shares in Air New Zealand have traded above $3 in both 2002 and 2007 - but yesterday closed at $1.05.

Based on that share price the Crown's 73.4 per cent stake could be worth $844.4 million. The dividends it has had from the company since 2001 have totalled $446.3 million.

The sell-down of shares could be like a mini initial public offering, Lim said. "I think if they sell it to institutions it would just be a straight placement but I think from a political point of view the Government would want to get retail investors involved."

Hamilton Hindin Greene director Grant Williamson said the market would be interested in the sell-down.

"Out of the [state-owned enterprises] this is probably the easiest because the market has already placed a value on those shares unlike the others that they'll have to set a price for.

"But the Government will have to make it attractive enough for investors to want to buy Air New Zealand shares, so it's probably going to have to be at least at a slight discount to the market price."

The New Zealand stock market needed to grow, Williamson said.

"It certainly hasn't for a number of years but we're certainly starting to see some pretty positive signs.

"Although the floats may not be large at this stage we've had Summerset come on board, Trade Me is lining up as well and then the [SOEs] next year, subject to the Government, then it will be good for the market," he said.

"It is definitely needed, particularly as the superannuation and KiwiSaver accounts grow you do need a bigger market to invest in."

Air New Zealand chairman John Palmer said having the Crown as a majority long-term holder in the airline was beneficial.

"For a relatively small international airline what events of the last probably 20 or 30 years have shown us, and particularly the last 10 or so, is that this is a tough business.

"It's a business where stability is really important, it's a business where in New Zealand's case the value of a national flag carrier is of some considerable value to the country as a whole, and particularly to tourism," Palmer said.

With the Crown as a long-term majority owner the company was not constantly concerned about being subject to a takeover by another shareholder which might have a different perspective on how the business should be run, he said.

"The big plus is that in pursuing a strategy, you're able to pursue that, confident that you've got sufficient time to make sure that you have an opportunity to get that strategy implemented and working."

The difference between the Crown owning 51 per cent or 73 per cent of the company would be barely noticeable at an operational level and the relationship in the way the company dealt with the Crown, which had no directors on the board, as a major shareholder would be unchanged, Palmer said.

Chief executive Rob Fyfe addressed the issue in a newsletter to staff this week telling them he valued the Government as a majority shareholder. "If the Government shareholding reduces to somewhere above 50 per cent, it has no material impact on how the business would operate."

Devon Funds Management principal Paul Glass was supportive of the proposed sell-down, which he described as "pretty sensible".

"One of the big issues with the stock at the moment and one of the reasons why a lot of institutions don't follow it is because of the very low liquidity and so any improvement in liquidity would be welcomed by the market."

Air New Zealand fell into a group of stocks known as lobster pots, meaning you could get in but never get out, Glass said.

"Unfortunately I subscribe to that Warren Buffett view on airlines - if you ever think about buying an airline stock just lie down and wait for the feeling to go away."

Devon did not invest in airline stocks and it was too early to say whether the planned Air NZ sell-down would change that position.

"It very much comes down to price and the prospects of the company at the time at which they look to do the placement."

Fyfe was well respected and understanding his tenure at the company would be a factor in the sell-down , Glass said. "Good-quality management is particularly important in those [airline] businesses."

Investors understood that airlines were considered strategic assets for countries and were more comfortable with having a significant government stake than they might be with other more traditional corporate ventures, Glass said.

"Of the various privatisations that they're going to do this is one of the easiest in terms of it already being listed, but possibly one of the more difficult in terms of the risk profile of the asset."

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