Buyers wary of Tranz Rail trucking unit

By PAM GRAHAM

Transport companies are kicking the tyres on Tranz Rail's trucking and logistics business operated under the TranzLink brand and are expected to place their opening bids for the operation next week.

Potential buyers received an information memorandum about a week ago and non-binding indicative bids are due on Monday at 3pm.

Due diligence, a process where buyers get to see more detailed information, is expected in May before final bids are lodged in June.

Tranz Rail needs to sell assets by the end of June to help it meet debt and lease payments.

Although at least three companies say they are interested in the Distribution Services Group, there are early signs that vendor and the buyers are way apart on price.

"We can confirm we are interested and we will be putting in an indicative bid on Monday," said Graham Simpson of Owens Group. Paul Little of Australia's Toll Holdings said: "We've received an information memorandum and we're looking at it right now."

Toll is acquisitive and also has a joint venture rail business in Australia with Patrick Corp.

Mainfreight's Don Braid said his company was having a look, but he was circumspect about the information received so far. "We're very cautious," he said.

Analysts say the business is difficult to value until contracts and charges going ahead with Tranz Rail's Rail Services Group, or main rail business, are known.

The Distribution Services Group is forecast to earn $2.2 million before interest and tax this year, rising to $7.2 million by 2004 and $10.3 million by 2005.

A rule of thumb of multiplying the ebit by anything between seven and 10 times suggests a $20 million value, but that does not take into account the forecast rise in earnings.

It is understood Tranz Rail is looking for more than $60 million, including the assumption of debt, and buyers are finding it difficult to see the value, although at this stage of the sale process it is in their interests to talk the price down and they do not have full information about the contracts with the rail group.

There are two schools of thought about whether it is a sensible business to be selling. One is that the trucking business competes with Tranz Rail's other customers and it should just focus on rail.

The other is that it is unwise to sell a business that feeds and shares buildings with the rail business, and that some of the freight travelling on TranzLink's trucks should be on rail anyway.

The group provides distribution, refrigerated and freight forwarding services. It has 30 branches and 329-strong truck fleet, including owner-drivers.

When Tranz Rail was floated in 1996 it was touted as an integrated transport operator with rail, road and a ferry business that could offer door-to-door service.

Toll's Little has said that the Distribution Services Group shares many facilities with other Tranz Rail operations and he was not sure how that would work in future.

Tranz Rail's interim chief financial officer John Loughlin said the company was selling non-core assets and "there is certainly no question of selling the crown jewels".

Tranz Rail is seen as a forced seller after its liquidity position became public in a spat with ratings agency Standard & Poor's. Tranz Rail argued in court documents that the value of Distribution Services Group would be reduced by $20 million if S&P downgraded it to B-. The company has since been downgraded to CCC.

According to figures supplied to the credit and rating agency Tranz Rail will have only $1.3 million of cash at the end of June and bank facilities fully drawn even if it sells $10.7 million of rolling stock to Carter Holt Harvey. Carter Holt has said it is not buying the rolling stock, though the market is speculating that the assets could be sold to a third party like a specialist lease company and leased by Carter Holt.

If that deal does not happen other assets have to be sold to provide cash to pay down bank facilities and to make a $21 million lease payment due in the June quarter.

"We have a lot of people sitting back seeing just how cheap assets could be, but the reality is we don't need to sell all of them," said Loughlin.

He could not say if the company would get an asset sale away in the June quarter.

"I don't want to get into the habit of talking things up. There are some good prospects there. It is just a case of seeing what will come together."

"Basically where we sit at the moment is we have a committed facility with our banks.

"We haven't breached any of the covenant. If we can't make asset sales then the banks may or may not choose to provide some support to us.

"It is a case of managing that situation as well as a range of options we have got."


Dealing points

For sale

* Distribution Services Group, a trucking and logistics business operating under the TranzLink brand. The group provides distribution, refrigerated and international freight forwarding services. It has 30 branches and 329-strong truck fleet, including owner-drivers.

Prospective buyers

* Owens Group (Auckland).

* Mainfreight (Auckland)

* Toll Holdings (Melbourne)

Value

* More than $20 million. Tranz Rail is understood to want more than $60 million.