Brian Gaynor: National sale worries central bankers

A recent paper by the Reserve Bank indicates that it has concerns about the possible sale of the National Bank to an Australian bank. It believes that the National Bank must remain a stand-alone organisation and will challenge any attempt to turn it into a branch bank of its overseas owner.

The paper points out that New Zealand does not have a Government-mandated deposit insurance scheme or regulatory measures to protect depositors. Unlike most other countries, we rely on a disclosure regime, which requires the banks to publish an extensive range of information about their business in the form of disclosure statements and requires some of this information to be packaged in a form that ordinary depositors can understand.

The Reserve Bank believes that a deposit insurance scheme or a Government guarantee of banks would remove the effectiveness of market disciplines and the incentives for depositors to monitor the financial health of their bank.

The problem is that few depositors ask for disclosure statements and the banks receive little attention from the media or analysts because they are not listed in New Zealand.

According to the Reserve Bank, the banking sector, which is dominated by five overseas-owned banks, faces a number of potential problems. These include:

* The banks are becoming more dependent on derivatives (off-balance-sheet foreign exchange and interest rate contracts), which make them more difficult to monitor.

* Overseas-owned banks can consolidate a number of functions, including payments clearing and other back office functions in their home country. This could cause problems if the banks experience difficulties in their domestic market.

* A number of countries, including Australia, have policies that give preference to depositors in the home country if a bank fails. This is particularly important for Westpac as it is the only one of the five major banks to operate as a branch system of its Australian parent. (The Banking Act in Australia gives priority to Australian depositors but the Westpac Banking Corporation Act in New Zealand gives depositors some protection in relation to Westpac's New Zealand assets.)

In light of this the Reserve Bank is determined that the National Bank remains a stand-alone bank. It says: "Our position is that we would expect there is to be no material transfers of National Bank business into branch form."

While on the topic of disclosure, the figures in the table indicate the huge exposure of our five major banks to off-balance-sheet foreign exchange and interest-rate contracts. The two banks with the biggest exposure to these derivatives, Westpac and Bank of New Zealand, have less than 40 per cent of their financial assets exposed to residential mortgages.

At the other extreme is ASB Bank, which has 65 per cent of its financial assets in the form of residential mortgage-backed loans but has a relatively low exposure to off-balance-sheet derivatives.

Tranz Rail The latest Grant Samuel report on Tranz Rail begs the question: Why is the Crown willing to enter an exclusive deal with Toll Holdings, which is worth between $1.34 and $1.62 a share, when it was only willing to strike a deal for existing Tranz Rail shareholders that is valued between $1.00 and $1.11 a share?

The answer is that the Crown is making its decisions on the run and Grant Samuel wrote that as far as the Toll/Crown and Crown/Tranz Rail deals were concerned, "There are a large number of issues which have not been negotiated and the precise manner in which the agreement(s) will operate is uncertain."

Toll Holdings is talking tough but it will not achieve its 90 per cent objective at its present offer price of 95c a share. To reach 90 per cent it will probably have to raise its offer to at least $1.20 a share. If it drops the acceptance level to 50.1 per cent it will have to offer at least $1.05 to achieve this objective.

If Toll sticks to 90 per cent at 95c, which is highly unlikely, and fails to achieve its objective then institutional investors will put enormous pressure on the Crown to offer the same deal to Tranz Rail as it has to Toll Holdings.

McConnell Dowell

On Friday McConnell Dowell shareholders approved the takeover of their company by the South African group Aveng for A$1.54 cash a share. This brings to an end the Australasian listing of a company that has had a colourful history but not achieved its enormous potential.

McConnell Dowell was formed in 1960 by two entrepreneurial engineers, Jim Dowell and Malcolm McConnell. In its first decade the company won several major pipeline contracts in New Zealand. In the 1970s the group expanded into Australia, Asia and the Middle East.

The company was listed in 1983 after the reverse takeover of the listed Hamilton-based construction company Hawkins Holdings.

McConnell Dowell, particularly Malcolm McConnell, was seduced by the 1980s hype. In December 1984 the engineering and construction group purchased 6 per cent of the Dunedin-based company National Insurance. McConnell said he wanted to diversify into financial services and, as chairman of the Government-owned Development Finance Corporation (DFC), believed he could add value to the Dunedin insurer.

National Insurance merged with City Realties, the listed property group, to form National Pacific Corporation. McConnell Dowell acquired a 30 per cent holding in the new group by purchasing Brierley Investments' 25 per cent stake in City Realties. The Dunedin establishment was appalled as it didn't believe that an Auckland-based engineering and construction group could add value to National Insurance.

McConnell became chairman of National Pacific and it bought 50 per cent of Wellington stockbroking firm Renouf Partners. McConnell Dowell raised its National Pacific shareholding to 49.3 per cent and David Beldotti, who was managing director of McConnell Dowell, became chief executive of National Pacific.

The position was shortlived as in mid-1987 James Boonzaier was head- hunted from South Africa to replace Beldotti at National Pacific.

McConnell Dowell also became involved in non-core activities during the 80s boom, including a shareholding in Graeme Hamilton's Kupe and the development of the controversial Robt Jones Tower (now ANZ Centre) in lower Albert St.

The 1987 sharemarket crash had a devastating impact on McConnell Dowell and it merged with Australian investment bank Inter-Pacific Equity and moved to Australia. Government Life (now Tower) bought National Pacific and Boonzaier started his 14-year career at that organisation.

McConnell Dowell gradually sold its non-core activities but it never fully recovered from its flawed strategy in the 80s. In 1991 the United States construction group Morrison Knudsen purchased a 48.9 per cent holding through the issue of new shares. In the mid-1990s Morrison Knudsen experienced serious financial problems and was forced to sell its stake to Dominion Bridge Corporation of Canada, which ended up with 63 per cent.

In 1999 Dominion Bridge sold its shareholding to LTA Ltd, a South Africa-based company controlled by Anglo American. The following year LTA was acquired by Aveng, a South Africa-listed construction company.

On Friday 87.4 per cent of McConnell Dowell's minority shareholders approved the acquisition of the company by Aveng at A$1.54 a share. This values McConnell Dowell, which is chaired by Jim Dowell, at A$65 million ($74 million) compared with NZ$488 million at the end of 1986. It was then New Zealand's 21st largest listed company.

McConnell Dowell has joined a long list of companies that have failed New Zealand investors. It had the potential to create substantial shareholder wealth but it invested in areas where it had no expertise and never fully recovered.

* Disclosure of interest: Brian Gaynor is a Tranz Rail shareholder.

* Email Colin James