COMMENT
Tranz Rail's feeble capitulation to Toll Holdings is a major blow for investors and the NZX. It is yet another example of a major company that was floated at an inflated price, was totally mismanaged and is now being sold far too cheaply.
Tranz Rail's directors are recommending the sale of
the country's largest transport operator, which has exclusive rights to the Government-maintained rail network until 2070, for a mere $231 million, or $1.10 a share.
Directors have recommended the offer, and some institutions have indicated they will accept, even though it is 26 per cent below the mid-point of Grant Samuel's $1.34 to $1.62 a share valuation.
The proposed sale of Tranz Rail is another reminder that Australian businessmen can drive incredibly hard bargains, particularly when New Zealanders are on the other side of the transaction.
It is also a reminder that the New Zealand Government is willing to assist Australian companies, whereas the Australian Government would never help our companies.
Air New Zealand did not do due diligence on Ansett and paid far too much for the debt-ridden carrier. Telecom, Baycorp, Tourism Holdings and Tower also paid too much for Australian assets.
The Apple & Pear Board sold Frucor Beverages to a consortium of Australian investors for $50 million, and they sold it back to the New Zealand public just two years later for a profit of approximately $175 million.
Vertex was another public float where assets were sold to Australian investors and sold back to us at a much higher price.
Three privatised companies - Bank of New Zealand, Air New Zealand and Tranz Rail - were rescued by the Government, which then encouraged their full or partial sale to Australian interests.
Bank of New Zealand was sold to National Australia Bank, Qantas will end up with 22.5 per cent of Air New Zealand if the proposed alliance is eventually approved, and Toll Holdings is well on its way to acquiring control of Tranz Rail.
Paul Little of Toll has shown the same determination as Don Argus of National Australia Bank and John O'Neill of the Australian Rugby Union in taking advantage of our commercial mistakes and poor management.
On a stand-alone basis, Grant Samuel valued Tranz Rail at between 68c and 87c a share. If the Tranz Rail/Crown proposal went ahead, Grant Samuel believes the railway operator would be worth between $1.00 and $1.11 a share and if Toll acquires the company and completes the deal with the Crown it has an assessed value of $1.34 to $1.62 a share.
Rail America offered 75c a share and Toll followed with a similar bid when Rail America dropped out. After the Crown announced its plan to buy back the track network, Toll raised its offer to 95c and to $1.10 last Friday.
Toll has driven a hard bargain as Grant Samuel's mid-point valuation increased by 91 per cent after the Crown's deal was announced yet the Australian company's offer price has been raised by only 47 per cent.
Little was far too tough and determined for our fund managers and the Tranz Rail board. He is a hardened Australian trucking operator, who has bustled and bluffed Tranz Rail and its major shareholders into submission.
Tranz Rail is a depressing example of dreadful corporate governance, total mismanagement, poor investment analysis and the feeble capitulation of our Government, the Tranz Rail board and institutional shareholders to a tough-talking Aussie.
We have to do far better than this.
Freightways
Investors should consider several issues before committing money to the Freightways offer, particularly the similarities to the Frucor and Vertex floats and to Tranz Rail.
Although a great deal is made of Freightways' history, the company was incorporated only on December 4, 2002. One of its original directors was Simon Allen, the NZX chairman and chief executive of ABN-Amro, a joint lead manager to the issue.
On December 13, Freightways acquired Freightways Express for $111.6 million. Freightways Express has had its preference shares listed on the NZX since October 1997 but Ausdoc, the listed Australian company, owned its ordinary shares until a year ago.
The acquisition was financed by $37 million of equity and $74.6 million of debt. This transaction, which was structured in a similar manner to the Fay Richwhite consortium's acquisition of Tranz Rail in 1993, has resulted in Freightways being much more highly leveraged than Freightways Express.
The original 37 million $1 shares have been split on a 3-for-1 basis and, following the issue of 5.6 million shares under the employee share ownership plan and 695,661 unpaid shares to directors, Freightways now has 117.5 million shares on offer.
A total of 77.5 million existing shares, which are mostly owned by ABN Amro Capital, and up to 11.3 million new shares are being offered to the public at an indicative range of between $1.55 and $1.90 a share.
At $1.55 the original shareholders would make a profit of $135 million in just nine months and at $1.90 they would make $174 million (these projected profit figures are indicative only).
ABN Amro Capital is a private equity fund. Frucor and Vertex were sold back to the New Zealand public by a similar fund that made huge short-term gains at the expense of New Zealand investors.
Freightways is now highly leveraged and is forecasting net earnings of $12.7 million for the June 2004 year compared with Freightways Express' $17.3 million for the June 2003 year.
The lower earnings are mainly due to the substantial increase in interest payments.
One of the attractions of the Freightways issue is the relatively high gross dividend yield. But there is a question mark over the sustainability of the dividend as the company is planning to pay out $13.5 million for the June 2004 year compared with net earnings of $12.7 million (after a goodwill deduction of $4.8 million).
Another way to look at Freightways is to compare it with Tranz Rail. Freightways is more highly geared and at Toll's $1.10-a-share offer the rail operator has a prospective earnings before interest, tax, depreciation and amortisation (ebitda) multiple of 2.3 compared with Freightways' multiple of 5.3.
Tranz Rail has an earnings before interest and tax (ebit) multiple of 4.8 compared with the new float's 6.1, and a prospective price/earnings multiple of 10.3 compared with Freightways' 15.1.
All Freightways multiples are calculated at $1.55, the bottom end of the indicative issue price range.
Although Tranz Rail looks cheaper at $1.10 than Freightways at $1.55, many investors will sell Tranz Rail and buy Freightways.
This is because investing, at least in the short term, is often about fashion and image and Freightways has been dressed up and packaged to appeal to the public. The new float also has superior management.
But in the medium to long term, Tranz Rail has better investment potential and it would take a brave individual to bet that the public will do better from an investment in Freightways than Toll Holdings will from its Tranz Rail acquisition.
RetailX
Some RetailX shareholders have been asking questions about directors' fees.
At the company's 2002 annual meeting just three items were on the agenda but the proxy statement/ballot paper had a fourth. This was "to fix directors' remuneration of $5000, an increase of $5000 over remuneration for the year ended March 31, 2001".
Shareholders were being asked to vote on directors' fees even though the item was not on the agenda.
Shareholders were shocked to see $61,667 classified as director fees in the 2003 annual report. It appears that this mostly represented the $60,000 salary paid to managing director Mark Taylor.
RetailX's shareholders have more to worry about than directors' fees as the company had total revenue of only $190,636 last year.
* Disclosure: Brian Gaynor is a Tranz Rail shareholder.
* Email Brian Gaynor
COMMENT
Tranz Rail's feeble capitulation to Toll Holdings is a major blow for investors and the NZX. It is yet another example of a major company that was floated at an inflated price, was totally mismanaged and is now being sold far too cheaply.
Tranz Rail's directors are recommending the sale of
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