Government to pay $75.8m for 35 per cent stake in Tranz Rail

The Government said today it had signed a heads of agreement with Tranz Rail to buy a 35 per cent stake in the railroad company for $75.8 million.

The deal is part of an agreement to restructure New Zealand's rail system.

A statement issued by Tranz Rail said the Government would be issued new shares at 67 cents each against the last traded price of 80 cents.

Tranz Rail is currently under takeover offer by Australian distribution company Toll Holdings at 75 cents per share.

After the share issue, the Government would be entitled to elect three of the seven directors on the Tranz Rail board.

The Government would also buy back the rail track, associated land lease, yards, terminals and control systems from Tranz Rail for just one dollar, and other land, property and leases surplus to Tranz Rail requirements for about $50 million, subject to final valuations.

The Government is making a payment to Tranz Rail of $44 million in mid-June as a deposit on rail network and assets it will acquire from Tranz Rail.

If the proposed transaction is not approved by Tranz Rail shareholders, this deposit would be repayable with interest on June 30, 2004.

Today's agreement, if it proceeds, is the second major partial re-nationalisation undertaken by the Labour-led Government elected in 1999. When it bailed Air New Zealand out in 2001, it took an 81 per cent stake in the airline.

A special Tranz Rail shareholders' meeting will be held in Auckland in July to consider the proposal.

Shareholders would be provided with an independent appraisal by Grant Samuel & Associates.

If the proposal is approved in July, it is intended that the restructured railway system would commence operations on September 30.

Under the proposal, Tranz Rail would place its rail network operations activities into a separate company to be purchased, owned and operated by the Crown.

Initially, the rail network operating company would be managed by Tranz Rail until midway through next year, after which it would function as a separate entity.

Tranz Rail would operate rail services on the track network under the terms of an exclusive access agreement, subject to existing third party access rights, which will terminate on December 31, 2070 (correct), unless terminated earlier under the provisions of the agreement.

Tranz Rail would obtain exclusive network access under a "use it or lose it" requirement that would be triggered if tonnage carried on lines drops below agreed levels.

In general, the trigger levels are equivalent to 60 per cent of the tonnage carried in the current financial year ending July 31, 2003, with lower levels specified for some industrial lines.

The "use it or lose it" requirement would contain a provision protecting Tranz Rail's exclusive track access rights against the effect of events outside its control.

Tranz Rail would pay a track access charge to the Government-owned track network operating company with charges set at levels that enable Tranz Rail to achieve a commercial return based on the weighted average cost of capital required to operate its rail freight, rail passenger and ferry businesses.

The track access charge would be payable in arrears, reviewable every three years, and subject to adjustment for investments in innovation that generates value for Tranz Rail. The charge for the first nine months of operation to June 30, 2004 would be fixed at $42.1 million.

Tranz Rail would initially manage the track network operations on behalf of the Crown-owned company until July 1, 2004 while the company established its own management structure.

The Crown track network operating company intends to invest an incremental $100 million over five years on projects to upgrade track network operations and safety standards.

Tranz Rail chairman Wayne Walden said that directors unanimously considered the proposals in the best interests of the company and would be recommending shareholder approval.

"It will immediately underpin the operating cash flow of Tranz Rail and stabilise its financial structure."

The company has had severe cash flow problems which have resulted in its shares crashing from $4.20 in March last year to just 30 cents in April.

Mr Walden said the proposal would see road and rail freight carriers competing on a level playing field for the first time -- with both contributing towards the cost of essential supporting infrastructure by user charges.

"The immediate deposit paid by the Government safeguards the company against potential short-term liquidity problems while shareholders consider the broader proposal and, subject to their approval, while we carry out the subsequent restructuring of railway operations," he said.

He said the restructuring would enable Tranz Rail "to break out of its current subsistence mode of operation, move into a new operating cost structure, and undertake development investments that will see the company realise its full commercial potential as a highly competitive rail-based freight transporter".

It encourages more freight to move off roads onto rail, he said.

"It promises benefits to the company and benefits to the country."

Mr Walden said the directors would examine options from "other interested parties" and make appropriate recommendations to shareholders. It would also continue the negotiations for the sale of assets that were currently in progress.

Tranz Rail was last month also subject to a 75 cents per share offer from US company RailAmerica but that company pulled its offer after a short period of due diligence.

Toll said it would not comment immediately.

- NZPA