Bell tolls for Tranz Rail

By PAM GRAHAM

In the end, the deal that will deliver Tranz Rail into Australian hands went through in a flurry on Thursday night and early yesterday morning.

"Don't even bother to call on us unless the price is at least $1.10," one New Zealand institution told Toll Holdings' adviser Deutsche Bank on Thursday afternoon.

As Toll managing director Paul Little tells it, he had strict instructions from his board that if $1.10 a share did not get up, that was it.

Until yesterday Toll owned 19.9 per cent of Tranz Rail, but its 95c a share offer for the rest had been accepted by virtually no one.

The two companies had been talking for weeks and Little rang Tranz Rail chairman Wayne Walden on Thursday night after presenting Toll's annual profit result in Melbourne that day. Walden agreed to take the higher offer to Tranz Rail's board.

Little crossed the Tasman on Thursday evening and Walden met him at his hotel in Wellington at 7am to say the offer would be unanimously recommended by the board.

Toll's advisers rang the big shareholders from 8am onward and within hours had signed up institutions owning 25 per cent of the company. Tower, AMP Henderson, Alliance Capital, Brook Asset Management and Infratil accepted.

Walden said the outcome was good for all concerned and his board had worked hard to get the higher offer. It had diligently sought competing offers but none had come in.

It will not be over until small shareholders owning about 25 per cent and arbitragers with about 10 per cent accept because the offer is conditional on 90 per cent acceptance.

The Australian company and New Zealand institutions yesterday sounded like bruised players leaving a sports field muttering, "Good game, good result."

Simon Botherway of Brook Asset Management, who fronted the institutional standoff, said the Australian company would succeed in getting total control. "I think they have got a very good buy," he said. Toll had the capital and management skills.

"One of the reasons we have chosen to accept the offer is that the company requires significant management skills, it requires investment and new strategic direction. Those sorts of capabilities are not readily available, and Toll has them."

Botherway would have sold some shares at 95c if Toll had sought only 50 per cent of the company, allowing minority shareholders a ride in the future. Toll has denied them that opportunity, but it has agreed to list its own shares in New Zealand to entice remaining shareholders to sell. It has extended the bid until October 10 and a campaign is planned.

Some who dealt with Little throughout the saga said he was a complex character and being offside with him was not pleasant.

Competitor Mainfreight yesterday capitulated and agreed to sell the small shareholding it had built up in Tranz Rail. Mainfreight managing director Don Braid said it was not acceptable for a competitor in road transport to own rail and that message had been delivered to Toll. However, Mainfreight held more talks with Toll yesterday and Mainfreight wants to move freight from road to rail if service is improved.

Though Toll and Tranz Rail were not saying yesterday if a plan to buy the Aratere ferry back from American leaseholders would go ahead, institutions think it will.

"We're still working on that," said Little.

The buyback will release foreign exchange gains and free up money held as security. The suggestion is that Toll will lend the money for the purchase and that the deal adds 7c-8c a share of value.

Why did Toll raise its bid? It got some information it wanted from the company about contracts, it met customers and it "took a level of comfort" from Tranz Rail's audited annual result released on August 29.

"The cash side of the business was better than we had originally thought," Little said.

What is Toll going to do with Tranz Rail? Little talked at a press conference as if he already owned the company but batted most questions about the future away with "I don't own it yet" remarks.

He did say the company will have a new name referring both to Toll and to New Zealand, but the future of head office and information technology staff does not look secure as Toll will put in its own IT platform.

Two of its senior staff in Australia have agreed to move to New Zealand as general manager and chief financial officer.

"They are very experienced and very well regarded managers inside Toll," said Little.

Surplus assets will be disposed of. "Our view is as we start getting new equipment on board we need to get rid of that old equipment pretty quickly."

He believes that the amount of freight carried on rail in Australia can be doubled from the present 20 per cent of total freight. He could not yet make that prediction about New Zealand.

The company is clearly eyeing RailAmerica's rail assets in Australia, which are rumoured to be available, but any purchase would probably be through Toll's railway joint venture with Patrick Corp. Little said he could not talk about that because "we're under confidentiality there".

Toll regarded the New Zealand transport market as similar to Australia's and it had drawn comfort from the support the New Zealand Government had given. It has a railtrack buyback deal that is triggered by a successful purchase of Tranz Rail.

"We can now set about closing this deal and start to improve the rail services offered in New Zealand," Little said.

Still, the $1.10 offered is less than the $1.34 to $1.62 a share Grant Samuel said the company was worth with the track deal.

The rail deal in a nutshell

* Toll Holdings is offering $1.10 a share for the 80.1 per cent of Tranz Rail it does not already own, valuing the company at $231 million.

* Tranz Rail directors have recommended the offer and shareholders owning about 25 per cent of the company have accepted.

* The offer closes at 6pm on October 10.

It is conditional on 90 per cent of shareholders accepting - the level needed to trigger compulsory acquisition of remaining shares.

* Under its deal with the Government, Toll will invest $100 million in rolling stock and the Government will invest $200 million in the track in consultation with Toll.

* A new crown entity called TrackCo will control the track and charge Tranz Rail for its use. For the first five years the charge will reflect TrackCo's operating costs.

* Toll will have exclusive access to the network for freight services, but the operation must meet yet-to-be-defined performance criteria. The Government can "step in" if volume on a line slips below 70 per cent of present use and there will be an incentive to encourage Toll to shift freight from road to rail.

* Toll has no interest in running passenger services. Little said yesterday that it was too early to make a call on branch lines or particular services.

* However, running unprofitable services was "the sort of thing we won't do."

* The transportation of coal from the West Coast of the South Island is one issue waiting for Toll. Lyttelton Port is investing in facilities capable of handling 4 million tonnes of coal a year, double the current amount handled, but there is no deal with rail for increased volume. Port of Marlborough is also looking into developing coal-handling facilities for coal barged from the West Coast.

* Solid Energy says it has had talks with Toll but received no indications of investment plans.

The infrastructures to move wood from forests in Northland and the East Coast are also outstanding issues.