Rail stake on the block

By DANIEL RIORDAN TRANSPORT WRITER

Tranz Rail's share price is likely to come under greater pressure after Canada's biggest rail operator yesterday took a 24 per cent stake in the company which it doesn't want.

Montreal's Canadian National Railway said yesterday that it was buying Wisconsin for $US1.2 billion ($2.8 billion), picking up Wisconsin Central's share in Tranz Rail in the process. The sale has the support of Wisconsin's board and is expected to be completed by October.

Wisconsin, and 14 per cent shareholder Fay Richwhite, put their Tranz Rail stakes on the market last November, but if anyone out there is interested in buying a 38 per cent slice of a diversified New Zealand rail and ferry operator, they are keeping very quiet, ominously so according to some in the market.

JP Morgan analyst Paul Turnbull said the ownership change was potentially bad news for Tranz Rail's share price, which closed 4c lower yesterday at $3.75.

He said the Wisconsin board, even though it was under pressure from its shareholders to sell underperforming assets such as Tranz Rail, might have held off from aggressively selling the stock on market if it was unable to find a trade buyer.

That was because the board supported the restructuring and saw a potential upside in the share price, said Mr Turnbull.

But the Canadians have said they will seek to sell the Tranz Rail stake even before they complete their acquisition of Wisconsin in October.

"We're likely to see some aggressive sell-down in the market if they can't find a trade buyer," said Mr Turnbull.

Credit Suisse First Boston analyst Andrew Mortimer said he continued to doubt anyone would be interested in buying the stake, given it meant a share of several diverse operations within Tranz Rail.

Buyers could target the parts of Tranz Rail they wanted as the company continued to seek to sell its non-core operations like its long-haul passenger services, refrigerated trucking operations, and its commuter rail networks in Auckland and Wellington.

Tranz Rail spokeswoman Nicola McFaull said the ownership change would not affect Tranz Rail's strategic direction, given the Canadian's undertaking to continue with plans to sell the stake. No changes to the Tranz Rail board were expected.

Canadian National operates about 25,000km of track in eight Canadian provinces and 14 states of the US. It serves all five major Canadian ports on the Atlantic and Pacific oceans and the Great Lakes as well as New Orleans on the Gulf of Mexico.

Listed on the New York Stock Exchange (exchange code CNI) the company made a net profit last calendar year of $C937 million ($1.44 billion) on revenue of $C5.43 billion. It has a market capitalisation of $US6.4 billion.

Wisconsin Central's market capitalisation is $US655 million

Last year, US regulatory authorities rejected Canadian National's plan to merge with Burlington Northern Santa Fe railway to create North America's biggest rail company, in a deal that would have been worth $US15 billion. But Canadian National chief executive Paul Tellier, who could not be reached for comment yesterday, earlier said he was confident the smaller size of the Wisconsin purchase meant the deal would pass muster with the US Surface Transportation Board.

Tranz Rail reports its December half-year result today, with analysts picking an average loss of $8.5 million, compared with a profit of $21 million previously.

Rising fuel costs continued to hit the company in the second quarter, although a relatively strong domestic economy and increased freight rates meant the quarter's performance would be much stronger than that of the first quarter, when it lost $16.4 million.