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Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Everyone's a winner in partial power float

50 comments
Weight of evidence shows mixed ownership gets best results for all

The value of the Bay of Plenty Regional Council's holding in Port of Tauranga has soared to $1.015 billion since listing on the NZX. Photo / Alan Gibson
The value of the Bay of Plenty Regional Council's holding in Port of Tauranga has soared to $1.015 billion since listing on the NZX. Photo / Alan Gibson

The partial sale of Mighty River Power (MRP) has created enormous debate and disagreement.

There are two clear points of view, namely those who are totally opposed to asset sales while others, including the 440,000 who have pre-registered for MRP's IPO, fully support the Government's partial privatisation programme.

There have been a large number of web comments and letters to newspapers but one, in particularly, caught the eye last week on the Herald's letter page.

The writer expressed his strong opposition in the following way: "The [asset sales] represent asset stripping. They are publicly owned by everyone, including poor people. The dividends they produce will no longer be returned to the population as a whole but to a small, wealthy minority. There is no innovation or expansion, just a continuation of the rich getting richer, and the poor poorer".

The first point is that the sale of 49 per cent of MRP to 300,000-plus New Zealanders is not asset stripping as none of the company's assets will be sold for the benefit of the Crown or the new minority shareholders.

The second point is that the Government will continue to receive 51 per cent of MRP's dividends and the payout should increase in the years ahead.

Port of Tauranga is a good example of this.

The Mount Maunganui company listed on the NZX in March 1992 after the public acquired a 44.7 per cent shareholding. The Bay of Plenty Regional Council owned the remaining 55.3 per cent.

Port of Tauranga paid a total dividend of only $2.2 million in the year before its NZX listing and the Regional Council's shareholding was worth just $44 million at the $1.05 a share IPO price.

Twenty years later the Bay of Plenty Regional Council's economic interest in the port company has increased as follows:

The council's shareholding has declined from 55.3 per cent to 54.9 per cent but the value of its holding has soared from $44 million to $1.015 billion.

The council now receives an annual dividend of $34.6 million from the port company compared with just $2.2 million when it owned 100 per cent.

Everyone is a winner - the Bay of Plenty Regional Council and its ratepayers, Port of Tauranga's minority shareholders and the company itself.

It is totally inappropriate to look at partial privatisation as a zero sum game, a game where there must be a loser for every winner. Partial privatisation can lead to a substantial increase in value and income for a regional council, or the government, if the listed company is well governed and managed.

The Ports of Auckland story also demonstrates the merits of partial privatisation and the downside of full political control.

Ports of Auckland listed on the NZX in October 1993 following the sale of 20 per cent to the public by the Waikato Regional Council at $1.60 a share. The remaining 80 per cent was held by Auckland Regional Services Trust with the shareholding later transferred to the Auckland Regional Council.

This 80 per cent shareholding was valued at $318 million at the $1.60 a share IPO price.

In the following 12 years, before the company was taken over by its majority shareholder, the Auckland Regional Council's economic interest increased as follows:

The council's shareholding remained at 80 per cent but the value of its holding soared from $318 million to $678 million at the $8 a share takeover price

The council's annual dividend from the port company jumped from $8.5 million to $34.3 million.

The company's performance has been poor since it was fully acquired by the Regional Council, now Auckland City, in 2005.

Auckland City's annual dividend has fallen from $34.3 million in 2005, when it owned 80 per cent of the company, to $20.1 million in the June 2012 year, even though it now has 100 per cent ownership.

Some may argue that Port of Tauranga has a superior geographical location and Auckland's traffic congestion has had a negative impact on Ports of Auckland.

However, when the Mount Maunganui company was floated in 1992 it was considered to be a sleepy regional port with little more growth prospects than Lyttelton Port or Northland Port.

But the Bay of Plenty company has show that a combined political/private ownership structure can deliver strong dividend growth and a substantial increase in value for all shareholders.

By contrast Ports of Auckland has gone backwards since it returned to full political ownership in 2005 and the problems at Solid Energy demonstrate that public servants and politicians don't have the ability to monitor commercial enterprises with growth ambitions.

The best structure for these growth-oriented organisations is a mix of public and private ownership.

Another example of this is Air New Zealand which was a disaster under full private ownership but is now performing extremely well with the government owning 73.1 per cent and the public 26.9 per cent.

Finally there is Auckland International Airport, which listed on the NZX in 1998 after the sale of the Crown's 51.6 per cent holding at $1.80 a share.

Following the IPO a number of regional councils owned 48.4 per cent while the public acquired the 51.6 per sold by the Crown.

Auckland City, which still owns 22.5 per cent, has seen the value of this shareholding rise from $170 million at the $1.80 a share IPO price to $870 million and its annual dividend, on the 22.5 per cent shareholding, rise from $5.4 million to $19.6 million.

The Herald letter writer was incorrect when he wrote that partially privatised companies have no innovation or expansion.

He was also mistaken when he wrote: "The dividends they produce will no longer be returned to the population as a whole", and that these IPOs are "just a continuation of the rich getting richer, and the poor poorer".

The evidence to date is that partially privatised companies are more innovative and successful than 100 per cent Crown owned or fully privatised enterprises. Partially privatised companies also raise their dividend and create wealth for all shareholders.

Meanwhile, there is considerable debate over Xero's share price at present with many observers, including a highly successful fund manager, claiming that the company is hopelessly overvalued.

This column is not attempting to justify the company's high share price but it is important to understand the way overseas shareholders, which now dominate Xero's share registry, may view the company.

High-risk-oriented US investors buy into companies that have extremely aggressive revenue growth or land grab strategies as they try to obliterate their competitors.

Amazon.com is a good example.

The accompanying figures show that Amazon.com has raised its total revenue from US$19.2 billion to US$61.1 billion since 2008.

It has changed the face of book retailing and its share price performance has substantially outperformed the Nasdaq Composite Index over this four-year period even though it has had little earnings growth.

Investors are attracted to the company because of its land grab and obliteration of the competitors' strategy. Many believe that this will deliver superior earnings in the longer term.

US investors are probably viewing Xero in the same light and are willing to overlook its immediate earnings prospects as long as its customer base and revenue is expanding rapidly.

That is why we have to disregard our traditional share price valuation methods when trying to understand Xero's share price as high-risk US investors, who now dominate the share registry, often take a different approach than we do.

It is only in the long term that we will know who is taking the correct approach towards Xero's current sharemarket valuation.

• Brian Gaynor is an executive director of Milford Asset Management which has investments in Air New Zealand, Auckland International Airport and Port of Tauranga on behalf of clients.

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

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