A railway in search of a saviour

By CHRIS DANIELS

Tranz Rail may be waiting for a corporate white knight to ride in and buy up a stake.

And in its search for help, the company may need look no farther than across the Tasman, where the entire railway industry has recently undergone massive restructuring, with state Governments now allowing rival rail operators to run on their taxpayer-owned track networks.

Some speculation in financial circles has, however, centred on a saviour from within - that senior Tranz Rail executives may be planning a management buyout, since the price of taking over the company, now struggling with a sinking share price, would be cheap.

But this could be part of the problem, since most of the institutional shareholders have only been Tranz Rail owners this year, when Fay Richwhite and Wisconsin Central left the register of shareholders.

The value of these institutions' stakes has dropped so much since then that they are unlikely to want to sell out now, preferring to wait at least until they have made some money from their investment.

And if profit forecasts by Tranz Rail managers are realised, the company's shares, at current value, represent a pretty good investment.

Another problem facing management in any takeover would be the difficulties of borrowing enough money. With a possible credit rating looming and banks re-negotiating Tranz Rail's entire debt portfolio, it would be difficult to secure finance for a buyout.

Some in the financial community feel that one thing working in favour of a management buyout is the man at the top. Michael Beard is well regarded, and could perhaps convince bankers to put up money for a management takeover.

Possible new owners of a stake in Tranz Rail are the same corporations that would be likely to operate their own railways in New Zealand, should the tracks ever be opened up to competition.

In February, Toll Holdings bought half of Australia's two biggest rail freight companies, National Rail and New South Wales state-owned FreightCorp, for A$1.2 billion. Another transport company, Patrick Corp, bought the other half.

National Rail never made a profit in Government hands. It lost A$360 million in its first year, 1993, narrowing to a A$2.3 million loss in the year ended June 30 last year. In its first month in private hands, it turned that loss into a A$3.9 million profit.

Whether this kind of turnaround can be sustained is not clear, but the Australian method of running a railway - in conjunction with trucks, stevedoring and logistics business - may soon be coming here.

Booz Allen Hamilton's head of the transportation practice for Australasia, Robert Williams, said the Australian method of granting open access to "above the tracks" while retaining state ownership of the rail infrastructure was working well.

States such as Western Australia and Queensland retained state-owned rail operators, and the ownership of the tracks was "ring fenced" - allowing the state operator to bid for contracts on equal terms with its private rivals.

In an open-access environment, if the Government spent money on the tracks the private owners would get the advantage, but in a competitive market the consumer would benefit.

Williams said that one of the main concerns in Australia had been whether the open-access model with the tracks owned by the state was enough to encourage investment in new rail assets.

"There's been a strong focus by regulators on ensuring that competition is fair, but there's been a concern that they haven't paid enough attention to the incentives to invest."

If the Government does get back into the rail track area, one of the biggest decisions it must make is whether to leave Tranz Rail as a vertically integrated operation or establish a national track company.

Providing this open-access system does add cost, according to Hamilton - it adds complexity and cost, so any authority must be sure that the benefits are worth it.

"You'd need to think carefully about whether setting up a rail track company focused entirely on its quarterly return is the best structure."

While subsidies - direct or otherwise - are politically much more palatable if paid to a state-owned entity rather than straight into the pockets of a publicly listed company, an immediate problem would present itself to the Government.

This would be what structure any new track-owning entity would take - would it be a state-owned enterprise, owning infrastructure and simply charging access fees, or some other body with a more public service-oriented ethos?

It is not clear, says one industry watcher, whether the rail track system could be run at a profit. Any Government owner would presumably charge the rail companies enough to cover the "weighted average cost of capital", which would then be passed on to the rail companies using the tracks.

A new level of administration would be added to the system, for no benefit to rail customers. On a single-track system, there would have to be some authority to take control of scheduling, an important safety requirement when rival rail companies are competing on the same stretch of track.

One financial analyst said yesterday that it was political, not financial pressure that was pushing Tranz Rail's big customers into lobbying the Government for an "open-access" deal for the tracks.

New Zealand's geography, along with the types of products carried by rail, made it difficult to transplant Australian solutions.

So corporate white knight or not, Tranz Rail looks like being the dominant force on the main trunk line for some time to come.