Tranz Rail's promise to reveal details of Government deal turns to dust

By SIMON LOUISSON

Tranz Rail's promise to detail the proposed bailout deal with the Government at a briefing today proved as feckless as the stricken company's profit forecasts.

There was little revealed except that the company is haggling to extract more from the Government.

"Really there is quite a lot more work to do to give enough information that you can really form a good view on this thing," chief executive Michael Beard admitted at the briefing.

Tranz Rail's board has to make a recommendation on Toll Holdings's rival 95 cents per share takeover bid by July 7. Ten days later it has to recommend on the Government deal.

Toll's offer closes on July 23 and shareholders vote on the Government deal on July 31, just one day before the target date for finalisation.

"We are working to get the Crown deal onto a faster timetable than that to enable us to give something meaningful to shareholders," Mr Beard said.

But today, no detail was provided on Tranz Rail's weighted average cost of capital (Wacc) or the value of the company's assets -- both crucial figures to properly evaluate the Government deal.

The Government proposal is for it to be issued new shares at 67 cents a share to give it 35 per cent of the company. The Crown would also buy the tracks for $1 and spend $100 million upgrading them over five years.

The deal allows Tranz Rail to lease the tracks at a rate that would allow it to make profits above its Wacc -- something the company admitted today it had never achieved.

"We need a lot more detail than this," Simon Botherway, of Brook Asset Management, complained during the briefing.

"In reality, the Toll bid is going to either succeed or fail before the shareholders get to vote on the Government bid," ASB Securities managing director Tim Preston said.

Chief financial officer John Loughlin said if the Crown had agreed to everything Tranz Rail wanted, the timetable would be "more acceptable".

"The reason there are delays in the Crown timetable is we're battling pretty hard to try and get more value into the deal for shareholders and try and get a better option."

Mr Loughlin said analysts had assessed the Government deal as valuing Tranz Rail shares at between $1.15 and $1.20 against today's price of 91 cents.

"There is little chance that it will be worse than that," he said.

"Our hope is that we can give you greater certainty as soon as possible when that comes to light," Mr Loughlin said.

If no agreement is reached with the Crown on asset values and Wacc, then Tranz Rail will have to publish a "range of possibilities" in its advice to shareholders.

The company detailed why it downgraded operating profit forecast to $48 million from $78 million last week.

But possibly as instructive was Mr Beard's comment that it was not in Tranz Rail's interest in negotiating with Government to forecast a high profit.

"In terms of putting up the $48 million for next year that was in our minds," Mr Beard said.

If Tranz Rail lowers its profit forecasts then track fees will be set based on their budget to allow them to earn Wacc. If the Government accepts the drastically lower budget, then Tranz Rail would have the chance to make super profits over the first three years of the track leasing deal.

Mr Beard admitted the earlier profit forecast, published before the Government deal was agreed, was "an overly-aggressive stretch target".

Tranz Rail also hinted it may now not sell its trucking division as had been indicated when the Heads of Agreement was signed with the Government on June 6.

Mr Loughlin pointed out that Tranz Link would be outside the regulation of profits applying to the mainstream business in the proposed Government deal. Increasingly there was a need for "integrated transport solutions", he said.

A change of mind over the sale of Tranz Link is likely to antagonise bidders such as Owens Group.

Tranz Rail's adviser, Patrick McCawe of Macquirie Equities, said the Government would be faced with "very substantially" higher maintenance costs in running the tracks than Tranz Rail would be prepared to spend.

A number of bridges needed to be replaced in three to five years, costing $50-75 million.

Mr Preston advised shareholders not to accept the Toll offer until all the details of the Government offer were known.

"The longer people wait the more informed a decision they will be able to make."

- NZPA