Gaynor: Privatisation leaves public behind

By BRIAN GAYNOR

The exit of Wisconsin Central International, with Sir Michael Fay and David Richwhite, from Tranz Rail signals the end of stage one of the company's privatisation.

This has been an extremely lucrative period for the original investors but not for the public.

In September 1993 Tranz Rail bought New Zealand Rail from the Government for $328.3 million. As Tranz Rail had 105 million shares issued at $1 each the purchase was financed by $105 million of equity and $223.3 million of debt raised against the assets of NZ Rail.

In June 1995, Tranz Rail had a capital repayment of $100 million that reduced the equity contribution of the original investors to just $16.4 million or an average cost of 20c a share (additional shares had been issued to Tranz Rail's management in the intervening period and they participated in the capital repayment).

The capital repayment was mainly financed by the sale of 15 per cent of Clear Communications for $72.6 million, $20.1 million above book value.

Wisconsin Central sold its 28.7 million Tranz Rail shares, representing 23.7 per cent of the company, for $106 million on February 21. Wisconsin realised a profit of $100m on its original investment of $37 million, not including advisory fees of $8 million.

Sir Michael and Richwhite sold 6.2 million Tranz Rail shares in 1999 and their remaining 17.6 million shares on February 8, giving them a total realisation of $117 million, including the capital repayment but not dividends.

This represents an $87 million profit on their original investment of $31 million, excluding advisory fees of $10 million.

Minority shareholders have not been so fortunate as they bought 31 million shares at $6.19 each in the 1996 public float.

The Tranz Rail privatisation has been an embarrassment to the Crown for a number of reasons:

* The four main original investors, Wisconsin, Fay and Richwhite, Berkshire Fund and Alex van Heeren, have realised total profits of $370 million from the sale of Tranz Rail shares and most of this has probably left the country.

* Public shareholders are sitting on a loss of $71 million on their 31 million shares.

* Since privatisation Tranz Rail has reported pre-tax earnings of $475 million but has paid tax of only $9 million.

* The Crown recently bought back the Auckland rail corridor for $81 million and Tranz Rail realised a profit of $58 million on the transaction.

Surely there must be a better way to privatise our state-owned assets.

Sir Michael Fay and David Richwhite

Has the New Zealand sharemarket seen the back end of Sir Michael Fay and David Richwhite after their exit from Tranz Rail?

The sale came 18 years and 4 months after the listing of Horizon Oil Exploration, their first major foray into the domestic sharemarket.

In 1986 Horizon Oil changed its name to Capital Markets and since then the listed and private interests of Sir Michael and Richwhite have been involved in several controversial investments in addition to Tranz Rail. These include:

* At the end of 1986 Capital Markets and Brierley Investments formed European Pacific Investments (EPI), the Winebox company. Capital Markets was issued 12.5 million shares at US$2 ($3.90) and immediately sold 3.5 million shares to Bank of New Zealand at $8.85 a share and 2 million to the New Zealand public at $11.85 a share. Two years later EPI was taken over for US$2.55 a share, leaving BNZ and the New Zealand public with total losses in excess of $60m and Capital Markets with a profit of $36 million.

* When Lion Corporation made a takeover offer for L.D. Nathan in 1988 it offered $9.20 a share in cash for the 35 per cent stake held by Fay, Richwhite & Co and one Lion share for every one L.D. Nathan share for all other shareholders.

As Lion's share price was only $5.60 at the time Fay, Richwhite was offered 64 per cent more than all other L.D. Nathan shareholders.

* In 1989 Capital Markets acquired a 30.4 per cent holding in the BNZ when it was given most of the Crown's entitlement to a 7 for 10 rights issue at 70c a share.

Subsequently the BNZ was saved from collapse by the Government and was eventually taken over by National Australia Bank at 80c a share.

Capital Markets made a profit of $41 million on its BNZ investment but New Zealand investors were far less fortunate as they paid $1.75 a share in the original BNZ public float.

* In 1990 Capital Markets, the listed entity, bought the private investment banking interests of Sir Michael and Richwhite for $225 million. The consideration was $110 million cash and $115 million worth of Capital Markets shares and was represented by $42.5 million of assets and $182.5 million goodwill.

When Sir Michael and Richwhite bought back the investment bank five years later, as part of the privatisation of Capital Markets (then called Fay, Richwhite), Grant Samuel valued the investment banking operations at less than $50 million.

* Just after the $225 million investment banking deal was announced the Crown sold Telecom to a consortium of investors at $1.81 a share. As part of this deal Fay, Richwhite bought 5 per cent of the telco at the same price. This has been Sir Michael's and Richwhite's most lucrative investment - they have realised a profit of $274 million from Telecom - but this shareholding was allocated to their private interests instead of Capital Markets, the listed entity.

Sir Michael Fay and David Richwhite have made a bucketful of money from their major investments through the NZSE. Other investors have not been as fortunate.

Auckland International Airport

Several interests should have big smiles on their faces after the release of Auckland International Airport's interim result.

The result clearly illustrates that a focus on growth, instead of clever financial deals and tax minimisation, can deliver excellent returns for all stakeholders.

Auckland Airport was listed on the Stock Exchange on July 28, 1998, after the sale of 216.8 million shares (51.6 per cent of the company) by the Government at $1.80 a share.

The remaining shares were owned by Auckland City Council (25.7 per cent), Manukau City Council (9.6 per cent), North Shore Council (7.2 per cent), Waitakere City Council (3.7 per cent), Franklin District Council (1.2 per cent) and Infratil (1 per cent).

North Shore, Waitakere, Franklin and Infratil have subsequently sold out.

Stakeholders have benefited from the partial privatisation of the country's largest airport as follows:

Public shareholders are sitting on a profit in excess of $500 million.

Several regional authorities have realised large cash profits.

Auckland City Council is ahead by $251 million and Manukau City Council by $94 million compared with the initial sale price of $1.80 a share.

Auckland Airport has reported pretax profits of $278 million since privatisation and paid tax of $88 million.

The benefits of Auckland Airport's privatisation have been widely distributed. That is a far better outcome than many of our other privatisations.

* bgaynor@xtra.co.nz