Brian Gaynor: Sale of dead cert was dead wrong

It wasn't a good week for the sharemarket even though the new benchmark NZSX50 Gross Index closed at three consecutive record highs (the long standing Capital Index is still 30 per cent below its September 1987 peak).

The bad news is the impending loss of Ports of Auckland after the Auckland Regional Council (ARC) reached 90 per cent and is moving to compulsory acquisition.

The NZX is under siege from predators and corporate restructuring.

Independent Newspapers was delisted on Monday and Westpac (NZ) Investments will officially depart on Monday. There is more to come as Carter Holt Harvey and NGC are also expected to go, cashed up Australians are scouring our corporate sector, left wing politicians want to reverse the privatisation process and New Zealanders are not good long-term shareholders and usually accept the first cash offer.

The NZX is already one of the world's smallest sharemarkets, both in absolute and relative terms, and it can ill afford to shrink further.

At the end of June the domestic market had a total value of $69 billion or 47 per cent of the country's GDP, whereas the ASX had a market capitalisation of A$972 billion or 114 per cent of Australia's GDP.

The chest beating and gloating of ARC chairman Michael Lee has been one of the most annoying aspects of the Ports of Auckland takeover.

Lee was quoted as saying that the 90 per cent threshold was "a historic day for Auckland" and that "the public buyback of 100 per cent of Ports of Auckland Limited is momentous and a vindication of those who fought so hard against privatisation in the early 90s".

These comments were made a day after the debacle over the train service to Eden Park for the Auckland versus the Lions game.

The ARC is ultimately responsible for the trains but there was no apology from Lee about Tuesday's dismal train service.

Lee took a particularly keen interest in the Tranz Rail privatisation and was appalled by the way the Fay/Richwhite consortium ran the company. His views on Tranz Rail are justified but a number of privatisations have been extremely successful and have delivered huge benefits to all stakeholders.

Lee tried to give the impression that he has saved Ports of Auckland from evil forces and it will now achieve its full potential under 100 per cent public ownership (it has always been at least 80 per cent).

He said: "The Ports of Auckland will be a prized legacy for future generations and the wealth generated by the Ports will be vital for funding Auckland's infrastructure for years to come".

Wait a minute Mr Lee, what do you think Ports of Auckland achieved on the stock exchange?

When the group was listed in 1993 the 80 per cent stake held by ARC's predecessor was worth $254 million at the IPO price of $1.60 a share.

Since then, the 80 per cent shareholder has received $502 million in dividends and capital repayments and its shareholding is worth $605 million at $7.13 a share, the highest market price in the six months before the $8.00 a share bid was announced.

In other words, ARC's $254 million holding has increased in value by $853 million with $502 million received in cash and $351 million in unrealised share value.

The company also made huge gains in terms of productivity and operating efficiencies. This has benefited exporters and importers.

Why did Ports of Auckland shareholders sell out without a fight when the company has consistently delivered fantastic returns and has a secure, excellent long-term future?

The independent directors were concerned that the offer might not be reasonable as it did not adequately provide for a number of issues, particularly the valuable waterfront land in the Western Reclamation. As a result they did not make any recommendation on the offer.

The port company has already realised $245 million from the sale of land and the Western Reclamation could be worth a further $300 million or $2.80 a share.

It also has a gross dividend yield of 7.6 per cent at the $8 bid price and, because of its strong balance sheet and cash flow, can maintain this and pay further special dividends.

The unusual feature of Ports bid is that acceptances by individual investors seem to have carried ARC across the 90 per cent line whereas it is the institutions, rather than this group, that usually accept.

This assessment is based on the observation that institutions don't usually accept until the last minute whereas ARH reached 90 per cent on July 6 and the offer doesn't close until July 15. In addition ARH went from 80 to 90 per cent with acceptances from nearly 60 of the total number of shareholders. It is quite clear from the Ports of Auckland offer, and shareholder statistics of large companies, that New Zealand investors are short-term orientated.

This is why we are quick to accept takeover bids and crystallise short-term profits.

As the accompanying table shows six of our largest listed privatised companies have struggled to maintain their shareholder base.

There are two groups in this table, Air NZ, Telecom and Tranz Rail were all 100 per cent trade sales by the Crown and the new owners then sold a percentage to the public.

Auckland International Airport and Contact Energy were direct sales by the government and the Waikato Regional Council sold its 20 per cent stake in Ports of Auckland.

The lead managers of the Ports of Auckland and Tranz Rail IPOs - two Fay, Richwhite associated companies - didn't have large private client bases and the new floats attracted a small number of individual shareholders.

Telecom shareholder numbers peaked at 63,610 in mid 2001 and have fallen back to 52,833 with 10,000 of these on the Australian register.

It is important to note that these figures do not include holders of American Depository Receipts (a security for North American investors that bundles eight Telecom shares into every ADR).

Bank of New York has been sponsoring these securities and in the past 12 months the number of ARD holders has risen from 18,000 to 35,000. ARD holders now own 10.6 per cent of Telecom.

Thus Telecom has 88,000 shareholders with 35,000 holding North American ADRs, 43,000 in New Zealand and 10,000 in Australia.

How did Bank of New York convince 17,000 new investors to buy Telecom ADRs in the past 12 months when Australasian shareholder numbers are virtually static?

Air New Zealand peaked at 42,111 in 2001 but since then has fallen steadily, The decline has accelerated in the past twelve months.

Ironically the two best performing privatisations have lost the most number of shareholders. Auckland International Airport is down from 65,411 since listing and Contact Energy, the other top performer, has experienced a huge fall, from 220,000 on listing day to 95,623 this week.

The Contact Energy figures indicate that New Zealand investors like to crystallise profits, even if their investment has great long-term prospects.

The NZX is under siege with the likes of Mike Lee and cashed up Australians scouring our market. New Zealanders' short-term attitude towards sharemarket investments is a godsend for these predators.

But the problem for New Zealand investors is that if they keep selling our major companies there will be limited domestic reinvestment opportunities.

Disclosure of interests; Brian Gaynor is an executive director of Milford Asset Management.

bgaynor@milfordasset.com