Foreign predators circle over sharemarket

By BRIAN GAYNOR

The sale of Fletcher Paper to Norske Skog is yet another reminder that New Zealand companies have been steadily falling into foreign hands over the past decade. This week's sharemarket performance also illustrates that the rise in overseas ownership can result in much greater volatility.

In the mid-1980s it was a completely different story. Many of our largest companies were Government-owned and the sharemarket, which had a total value of $42.4 billion in December 1986, was more than 95 per cent owned by New Zealand based companies, managed funds and individuals.

Overseas interest picked up in the late 1980s and early 1990s for a number of reasons. These included:

* New Zealand assets were cheap following the1987 sharemarket crash.

* Offshore investment became fashionable in the northern hemisphere.

* The New Zealand Government's privatisation programme had a strong bias towards foreign investors, and overseas fund managers were attracted by National's economic reforms.

In the eight years ended December 1997, offshore ownership of the New Zealand sharemarket surged from 19 per cent to 60 per cent. These figures understated the overseas ownership of the local business sector for several reasons, including:

* Government assets such as the DFC, Post Bank, Shipping Corporation, State Insurance Office and Tourist Hotel Corporation were sold directly to offshore interests.

* A number of large listed companies _ including Bank of New Zealand, Wilson & Horton, Countrywide Banking, Trust Bank, Milburn New Zealand and Progressive Enterprises _ were taken over by foreign-owned groups.

The methodology used to calculate overseas ownership is based on a ``first round'' level of ownership only. For example News Corporation owns 50 per cent of INL and INL owns 50 per cent of Sky TV. So, Sky TV is effectively 25 per cent overseas owned, but none of INL's shareholding in Sky is included in the overseas ownership classification.

In the past two years, foreign ownership of the market has declined from 60 to 55 per cent because international investors have become impatient with New Zealand's poor economic performance.

But there is still strong overseas interest, particularly in the energy sector. Fletcher Energy sold its 33 per cent shareholding in Natural Gas Corporation to Australian interests and overseas groups have takenstakes in Contact Energy and TrustPower.

In the past decade, total domestic ownership of the market has increased from $18.2 billion to $24.8 billion. These figures are relatively modest when compared with an estimated $40 billion of listed shares owned by New Zealand investors in December 1986.

Individuals' direct exposure to the market has increased from $8.8 billion to $12.2 billion in the past two years, mainly because of the Auckland Airport, Contact Energy and Tower listings.

But the sharemarket is a distant second to residential housing. At the end of 1989 retail investors had $13.5 billion invested in the sharemarket, either directly or indirectly through managed funds, and less than $15 billion borrowed on residential mortgages. In the next 10 years, individuals increased their exposure to the New Zealand sharemarket by $5.9 billion to $19.4 billion while housing loans surged $42 billion to $57 billion.

In other words, every adult living in New Zealand has an average housing loan of $21,400, but only $7300 invested in the local sharemarket.

New Zealand shares have been relatively cheap because we remain unwilling to invest in our own companies.

These low share prices have beenattractive to overseas predators because a change in management can bring about a dramatic improvement.

Fletcher Paper is a good example of this. The company's share price languished in the $1.10 to $1.40 range earlier this year as domestic and international investors lost confidence in its directors and management. No analyst was predicting a $2.50 per share offer, yet European analysts believe it is an excellent purchase for Norske Skog at that price.

The sale is a loss to the New Zealand economy because the Fletcher Group was one of the few domestic companies with offshore assets that had the potential to generate large overseas earnings for New Zealand. As Fletcher Paper held $5.8 billion of Fletcher Challenge's total offshore assets of $7.6 billion, it effectively ends the group's international aspirations.

There are other ways that overseas groups are gaining control of New Zealand businesses.

On Thursday, UnitedNetworks shareholders approved the acquisition of Orion New Zealand for $550 million. UnitedNetworks is a Takapuna-based electricity lines company, 79 per cent owned by UtiliCorp of the United States. Orion, previously listed as Welgas Holdings and Enerco, runs the gas distribution network in Auckland, Manawatu, Horowhenua, Hawkes Bay and Wellington.

The most frustrating aspect of this week's meeting was that the notice of meeting contained little substantive information on Orion. This is not unusual where a foreign group owns 79 per cent of a listed company and does not need the support of New Zealand shareholders to carry a resolution.

The high level of overseas ownership would not be a concern if New Zealand companies had substantial overseas investments. Unfortunately this is not the situation.

Statistics New Zealand figures showtotal foreign investment in New Zealand was $126.2 billion at 31 March 1999 and our total offshore investment was just $40.3 billion.

In other words, New Zealand has a negative international investment position of $85.9 billion, based on the latest official figures.

Recent sharemarket developments indicate that our international investment deficit is widening.

On the plus side, Telecom has bought a significant shareholding in AAPT in Australia, Air New Zealand has received approval to buy the remaining 50 per cent of Ansett Holdings and Sky City has bought the Adelaide casino.

The sale of Fletcher Paper will knock a big hole in New Zealand's offshore investment figures. In addition, Carter Holt Harvey has sold out of Chile; New Zealand shareholders continue to sell their holdings in AMP, Axa and Colonial, and Brierley Investments and Nufarm have emigrated to Australia and Singapore respectively.

There is nothing wrong with the sale of overseas assets as long as the proceeds are reinvested in export-orientated operations or other foreign exchange-earning activities. Experience suggestsforeign asset sale proceeds are more likely to be reinvested in property or spent on imports.

The lack of interest in the sharemarket is having an impact on all of us because share prices are cheap and New Zealand companies are easy targets for foreign predators.

This has encouraged overseas interests to purchase existing companies instead of investing in new greenfield operations.

The purchase of established assets will have a long-term impact on New Zealand's prosperity because wealth accrues to the owners of assets.

It will continue to have a negative impact on the balance of payments _ and the New Zealand dollar _ because dividends flowing out of New Zealand are growing more rapidly than dividends earned on our overseas investments.

It will also have an impact on the sharemarket because overseas investors usually want to take their money out when they experience problems in their home market.