Gaynor: Air NZ capital plans at tricky stage

By BRIAN GAYNOR

Air New Zealand

The proposed recapitalisation of Air New Zealand is entering a difficult stage.

Chief executive Gary Toomey said in a radio interview on Saturday that it was important Singapore Airlines acquired a 49 per cent shareholding through a placement of new shares.

This would require the issue of 356 million new shares, raising a total of $466 million at the designated price of $1.31 a share.

But what will happen to the current capital structure, which is made up of 51 per cent A shares (they must be held by New Zealand nationals) and 49 per cent B shares (mainly held by overseas investors)?

After the placement, Singapore Airlines will own 49 per cent of the company in the form of B shares. As existing B shareholders will hold 16.3 per cent, this share class will represent 65.3 per cent of the post issue capital.

When Brierley Investments' diluted holding of 20.6 per cent is taken into account, this brings the effective foreign ownership of Air New Zealand to 85.9 per cent. Is this consistent with the aim of keeping our national carrier under New Zealand control?

Will the B shares be delisted and will BIL and other non-nationals, with the exception of Singapore Airlines, be forced to sell their holdings?

If BIL and existing B shareholders are forced to sell, will they be prepared to vote in favour of a major share placement to Singapore Airlines?

Air New Zealand's recapitalisation will have to be carefully structured to ensure that Singapore Airlines acquires 49 per cent, the airline remains under New Zealand control and existing shareholders support the deal.

Contact Energy

Mission Contact Finance's $250 million redeemable preference share issue, which is being extensively advertised, is an extremely complex investment.

Essentially, individuals are being asked to subscribe for a fixed interest security issued by Mission Contact Finance. Their money will then be used by Mission Contact Finance to buy redeemable shares in Mission Energy Pacific Holdings, the owner of 50.1 per cent of Contact Energy and a fully owned subsidiary of California-based Edison Mission Energy.

In other words, New Zealand fixed-interest investors will partially finance Edison Mission Energy's controlling stake in Contact Energy.

Like many other high-rate fixed interest securities, the redeemable preference shares have some risks but no upside potential if held to maturity. A direct investment in Contact Energy looks like a far better proposition.

The redeemable preference shares are being offered at a dividend yield of 6.03 per cent fully imputed, the equivalent of 9.0 per cent pre-tax.

Based on prospectus projections for the September 2002 year, Contact Energy has a prospective dividend yield of 6.86 per cent fully imputed, the equivalent of 10.2 per cent pre-tax at yesterday's closing price of $3.06.

As Contact Energy has a policy of progressively raising its dividend each year, and the redeemable preference dividend will remain static through to maturity in July 2006, the ordinary shares are far more attractive.

Mission Contact Finance's fixed interest securities would be hopelessly uncompetitive in most financial markets when compared with an equity investment offering a higher dividend yield. But they have already attracted subscriptions of more than $150 million because of an aversion towards equity investments in this country.

Tranz Rail

The sale of most of Tranz Rail's long distance passenger services, and the expected closure of the remainder, highlights the Government's flawed privatisation strategy.

In September 1993 a consortium including Fay, Richwhite, Alex van Heeren and a United States rail company, Wisconsin Central, bought NZ Rail from the Crown.

Wisconsin Central is a rail freight company with no passenger operations and none of the other shareholders had any expertise in moving people by train. Rail passenger transport has become increasingly popular in many parts of the world, yet Tranz Rail has done little to promote its passenger services.

Belatedly, politicians are trying to keep the ailing long-distance routes open and to buy the Auckland and Wellington commuter services back from Tranz Rail.

Meanwhile, Wisconsin Central proudly boasts on its website that it invested $US22.3 million in Tranz Rail and has already received $US30.7 million in capital returns and dividends. When its 28.8 million remaining shares are taken into account, Wisconsin is sitting on a profit of $US54.2 million ($133 million) or 243 per cent.

By comparison, New Zealand investors who bought new shares in the 1996 public float at $6.19 are sitting on a 37 per cent loss.

After the botched privatisation programme, our politicians should declare that New Zealand sharemarket investors and long-distance train travellers are endangered species in need of special protection.

Wilson Neill

The change in control at Wilson Neill highlights a lack of coordination between the takeovers code and the Securities Amendment Act 1988.

Wilson Neill comes under the jurisdiction of the takeovers code because it has more than 7000 shareholders and $20 million in assets. But it does not have a continuous disclosure requirement and is not subject to the substantial security holders notice provisions of the Securities Amendment Act 1988 because it is not listed on the stock exchange.

The company has embraced these relaxed requirements and its disclosure standards fall well short of best practice.

Last week it was widely rumoured that someone was trying to accumulate a controlling shareholding before July 1. This was confirmed on Monday when chairman Trevor Mason announced that Transram Group had acquired a 50 per cent holding. Transram is related to WeCU, the company that acquired a 27 per cent stake in Wilson Neill's Radionet for $17.5 million this year.

It is understood that Tim Connell, who was issued 250 million shares in consideration for his publishing business (which includes New Zealand Business Times), has reduced his shareholding.

It seems obvious that all takeovers code companies should be subject to the substantial security holders notice provisions so that investors are aware when the initial 20 per cent is being accumulated and when major shareholders have reduced their shareholding.

* bgaynor@xtra.co.nz