KEY POINTS:
Shareholders in Auckland Airport could be forgiven for being thoroughly confused by now.
Their directors, or at least a majority of them, are advising them to tell the Canadians to get lost, and vote no to a resolution which would allow their partial takeover offerto proceed.
But at
the same time the directors are advising shareholders to sell into the offer, in case it does get the green light.
That implicitly recognises (or explicitly in the case of directors John Didsbury and Joan Withers) that we are unlikely to see this price again for quite a while.
Meanwhile the Government has announced it plans to remove the tax advantage of a "stapled security" offer.
But the offer before shareholders right now is all cash.
To quote former All Black Grahame Thorne in another context, it's all a bit hard on theold brain.
Essentially there are two questions shareholders need to ask themselves before the offer closes on March 13:
1: Is it worth $3.65 a share to me to continue to hold shares in the airport company, or is there some better use to which I could put this money?
2: Why is the Canadian Pension Plan Investment Board (CPPIB) prepared to pay $3.65, a substantial premium to the market price?
Answers to the first question are liable to vary, as chairman Tony Frankham says, depending on the investor's time horizon.
The New Zealand stock exchange is not exactly overcrowded with companies of AIAL's size and quality. But if you can overcome home bias there are no doubt bargains to be had overseas, given the recent carnage on world equity markets.
As for the second question - why is it worth so much to them?- we can discount the possibility that they are just suckers. They are professional investors entrusted with $150 billion of hardworking Canadians' retirement funds. The price they are offering clearly includes a premium for control.
Never mind the protestations that it isn't really control because they are only going for 40 per cent and they will undertake not to vote all their shares in some cases; there is no free lunch.
So the question is what do they intend to do with that control?
Well, they have told us: They want to gear the company up.
They want to replace equity with debt and taxable profits with tax-deductible interest payments.
Which is why the Government has a problem with it.
The original capital restructuring plan, put to the board last September but rejected, would have left the new company with just $129 million in equity and $4.1 billion in convertible notes.
That was amended last December to $862 million of equity and $3.4 billion of convertible notes.
The CPPIB envisages an increase in the company's senior debt (to people other than shareholders) as well, but "robust financial polices" would be adopted including keeping the interest cover ratio at around two times.
This represents pretty radical change from a balance sheet which as at the end of last year has shareholders' equity of $1.91 billion funding 63 per cent of the company's total assets of $3.04 billion.
The guardians of the tax base inevitably look on this with narrowed eyes and curled lips.
At the indicative interest rate of 7 per cent, interest on $3.4 billion worth of notes would be $238 million.
At the new corporate rate of 30c in the dollar, that is $71 million a year in tax foregone at the company level (though some of it would be clawed back downstream). It is a lot of hip replacements.
By contrast, under the status quo the airport company in the second half of last year paid just $34 million in interest and $25 million in tax.
The capital restructuring is - or was to have been - the second phase of the Canadian plan.
Phase one, which is in train at the moment, is to make a cash offer for enough shares in the existing company to take their stake up to40 per cent.
That would be a position of strength from which to negotiate with the remaining shareholders, including the Auckland and Manukau city councils.
Until Monday's announced amendment to the tax laws, phase two was to have been effected by an issue of stapled securities in the new company to the remaining shareholders of the existing one.
These securities would be an ordinary share with a face value of 70c stapled to an interest-bearing convertible note of a face value of $2.75. "Stapled" means you can't sell one without the other.
Finance Minister Michael Cullen said: "If those instruments were to become common in New Zealand the amount of debt deductions against our tax base could increase significantly.
"The issue becomes particularly acute of the instruments are issued to foreign investors in New Zealand companies."
So the Government will amend the tax law, with effect from Monday, to treat the debt portion of stapled securities as equity for tax purposes.
Fair enough, you may think.
But KPMG's tax partners point out that we already have "thin capitalisation" rules designed to prevent companies from claiming excessive interest deductions for tax purposes. If the Government thought those rules inadequate, in this case amending them, rather than attacking stapled securities, would be the better way to go.
The Government's approach seems to favour wholly-owned companies with a foreign parent, which can have up to 75 per cent gearing under the thin cap rules, over companies with a wide shareholding which also want to have shareholder debt but through a stapling mechanism,they say.
In any case it is likely to put paid to the particular form of restructuring the Canadians had in mind, but that plan was always conditional on a favourable ruling from the tax authorities.
So they may well have a Plan C.
After all, there are any number of ways you can scoop out the equity in a company and replace it with debt - if that is what you want to do.
Should it be, though?
There may be a case to argue that AIAL's balance sheet is top-heavy in equity and that its cost of capital could be lowered if it was less lightly geared.
But surely these are times which remind us that there are good reasons for equity funding.
The financial bubbles now popping so messily around the world were inflated by cheap credit and an insouciant attitude toward debt on the part of lenders and borrowers both.
Apart from some vague talk about working with the tourism industry it is not clear what the CPPIB brings to the table. Financial engineering at the expense of the New Zealand tax base isn't adding value, in my book.
The airport after all is a monopoly, which sits athwart the country's main gateway for international travellers and the second largest port by value.
Sure, we have the Commerce Commission to ensure it does not abuse that monopoly.
But if some monopoly rent does get by them, surely it is better that it flows to New Zealand investors than foreign ones.
* Disclosure of interest: Brian Fallow is a shareholder in Auckland International Airport.
