Brian Gaynor: A champion for corporate dogs in distress

The New Zealand Government is becoming a world leader in rescuing privatised companies. It has now bailed out, or is attempting to bail out, three of the 12 largest privatisations by sales value. These are the Bank of New Zealand (fourth largest), Air New Zealand (ninth) and New Zealand Rail (12th).

The third largest privatisation, the Forestry Corporation (Central North Island Forest Partnership), is in receivership but the Crown has stayed well clear of its problems.

The Tranz Rail rescue plan is still subject to shareholder approval but it has been recommended by directors and is more likely to succeed than the Toll Holdings' offer, even after it was raised yesterday from 75c to 95c a share.

In 1990 the Crown rescued the Bank of New Zealand (BNZ) by supporting a Fay Richwhite proposal to ringfence the bank's bad debts into a separate company called Adbro. The rescue cost $720 million, with the Crown supplying $620 million and Fay Richwhite $100 million.

Following the restructuring, the Government's shareholding in the BNZ grew from 51.8 per cent to 58.2 per cent, Fay Richwhite's fell from 29.8 per cent to 26.8 per cent and the public's declined from 18.4 per cent to 15 per cent.

Labour Finance Minister David Caygill put the Adbro agreement together but it was not completed before the general election on October 27, 1990. On the day following the election Jim Bolger, the incoming National Prime Minister, was briefed on the BNZ's problems and one of his first big announcements was the Adbro restructuring.

With Bill Birch and Ruth Richardson, two hard-line privateers, holding powerful Cabinet positions it was inevitable the BNZ would be sold when the first offer appeared. National Australia Bank (NAB) spotted the opportunity and in mid-1992 made a cheeky offer at 80c a share.

The Crown and Fay Richwhite, who had been given a favourable deal in the Adbro restructuring, rushed to accept NAB's offer, which was worth $1.4 billion compared with the BNZ's estimated current value of about $7 billion.

The Government's next big bailout was at the end of 2001 when it invested $885 million in Air New Zealand. In return it received 2.167 billion ordinary shares at 27c each and 1.28 billion convertible preference shares at 24c. This 82 per cent stake is now worth $1.827 billion and the Crown is sitting on a profit of $942 million.

The proposed Tranz Rail rescue plan has four major elements:

* The Government will buy 113.2 million Tranz Rail shares for $75.8 million (67c each) giving it a 35 per cent shareholding.

* The Crown will acquire Tranz Rail's track and associated infrastructure for $1. Tranz Rail will have exclusive use of the track until 2070 on a "use it or lose it" basis.

* Tranz Rail will pay an annual charge for the use of the track. This has been set at $55 million for the June 2004 year ($42.2 million for the nine months it will be operative) and at a maximum of $60 million, $65 million and $70 million for the following three financial years.

* The Government will buy back various assets, including land and property, from the rail operator for $50 million. A downpayment of $44 million will be made on these purchases but this will be turned into a loan if shareholders reject the overall proposal.

If the deal is approved the Crown will have handed out $1.6308 billion to rescue the BNZ, Air New Zealand and Tranz Rail. But the good news for taxpayers is the Government made money on the BNZ bailout, although it could have made a great deal more, and is more than $900 million ahead on its Air New Zealand investment.

From a financial point of view Finance Minister Michael Cullen has plenty to smile about because Air New Zealand was originally sold for only $660 million and many private sector investors lost their shirts on the company.

So why is the Government bailing out Tranz Rail when Toll Holdings has announced it will make a takeover offer for the company?

There are probably three main reasons:

* Labour has a strong left-of-centre tradition and many of its current leaders were less-than-wholehearted supporters of the 1990s privatisation programme. They probably believe that partial renationalisation is justified because four of our 12 largest privatisations by sales value have effectively gone broke under private sector management.

* From a financial point of view the Crown has done extremely well from the BNZ and Air New Zealand bailouts and it has driven a fairly hard bargain as far as Tranz Rail is concerned.

* The Government wants to ensure railway is a viable and cost-effective option to road transport. If the railway system collapses it will put a huge burden on the road system, both from an operational and financial point of view.

But the proposal has one serious flaw: Tranz Rail will have monopoly rights over the track until 2070. Under the use-it-or-lose-it provision the company will lose its access to individual lines (there are over 40 of these) if it does not meet minimum volume requirements. These volume requirements are generally set at 60 per cent of June 2003 year levels.

Why has the Crown given monopoly rights to a company that has been hopelessly mismanaged? Why have the minimum volume requirements been set at such a low level? If Tranz Rail fails to achieve the minimum volume requirements on one line, is another company going to operate this line when it won't have access to the others?

It was particularly surprising to see the Rail Freight Action Group, a lobby group of major rail freight users, rush out a press release in support of the proposal, which reinforces Tranz Rail's monopoly position, just hours after the announcement.

Tranz Rail shareholders now have two proposals to consider - a Government bailout and a takeover offer from Toll Holdings at 95c a share.

The company's directors have supported the Government proposal. After the deal was announced, chairman Wayne Walden said: "As matters stand today, it is the unanimous view of the directors that the proposed transaction with the Government is in the best interests of the company.

"It will immediately underpin the operating cash flow of Tranz Rail and stabilise its financial structure."

In other words the rail operator is in serious financial trouble and the $44 million it will receive from the Crown next week will keep the banks off its back.

But the important words in Walden's statement were "as matters stand today". This left the door open for Toll Holdings to increase its original 75c a share offer.

Tranz Rail shareholders will be asked to approve the Government's proposal at a special meeting on July 11.

Under the Takeovers Code, Toll is required to mail its formal offer to shareholders between June 17 and July 3. Thus shareholders should have a great deal more information on both proposals when they meet on July 11.

At this stage the Crown's proposal is more likely to succeed because it has been endorsed by directors and Toll's revised offer is too low following the Crown's $44 million cash injection. But the Tranz Rail drama is far from over and there may be further unexpected developments in the weeks ahead.

* Disclosure of interest: none

* bgaynor@xtra.co.nz