Brian Gaynor: Public inquiry should follow taxpayer bailout

The privatisation of the Bank of New Zealand, Air New Zealand and Tranz Rail has turned out to be a complete fizzer. The Government bailed out the first two and Tranz Rail is now in dire need of a major capital injection.

How could this happen? How could three of our most important companies experience serious financial problems after they moved from public to private stewardship?

They were all sold at a low price, raised plenty of capital from investors and many of our most experienced and highly regarded businessmen were on their boards.

Bank of New Zealand and Air New Zealand are easy enough to explain. They suffered huge losses in Australia. But Tranz Rail is a different matter. The root causes of its problems are less obvious because it doesn't have any substantial Australian activities.

It has made some stupid decisions, including an attempt to gag Standard & Poor's from releasing details of its credit rating downgrade. Chief financial officer Wayne Collins recommended this approach, it was endorsed by the board and Collins was given the boot when the court action backfired badly.

If the Government bails out the rail operator it has a strong obligation to investigate what went wrong. A Government organisation or major accounting firm should carry out this inquiry and a full report should be released to the public.

Too many of our major companies are failing, the Government is forced to bail them out and the issue is then swept under the carpet.

The business community has learned little from its past failures, partly because there hasn't been a comprehensive review into these failed companies.

The Government will be neglecting its duty if it participates in Tranz Rail's restructuring and doesn't initiate a full inquiry into the company since its privatisation.

INL Tax is playing a huge role in the sale of INL's publishing assets to Fairfax Holdings.

The deal is attractive to Fairfax because it can avoid paying tax on its New Zealand acquisition as a result of its proposed sale and lease back of INL's mastheads.

Tax is also an important issue when determining the percentage of the asset sale proceeds that will be distributed to INL shareholders.

But what about the tax losses that have been transferred from Sky Network Television to INL? What will happen to them?

Sky, which is 66 per cent owned by INL, has been transferring tax losses to its parent since July 1, 2001. These losses reduce INL's tax bill but the newspaper proprietor has a contingent obligation to pay compensation to Sky for these tax losses when the television operator becomes a taxpayer.

According to a Stock Exchange release: "The compensation due under the agreement will be a contingent obligation of INL until it is virtually certain under accounting rules that Sky will reach a tax paying position, after utilising its accumulated losses."

Since July 2001 INL has used $93.8 million of Sky's tax losses, representing a future compensation payment to the television company of $30.9 million (representing 33c in the dollar).

Now that INL's publishing assets are being sold, what will happen to the future compensation payment? Will this payment be made out of the proceeds of the asset sale or will Sky shareholders miss out?

Sky shareholders could miss out if all proceeds from the asset sale are paid out to INL shareholders, there is an in specie distribution of Sky shares to INL shareholders and the publishing group is liquidated.

The Sky/INL tax deal is unsatisfactory because it favours the majority shareholder over the minorities, the full details of the agreement have not been released and it should have been the subject of shareholder approval. (Sky was able to avoid shareholder approval because it used a stock exchange waiver granted in relation to programme arrangements with Rupert Murdoch's News Corporation, which owns 45 per cent of INL.)

The recently announced agreement between NGC Holding and AGL Group, its 67 per cent controlling shareholder, is a much more satisfactory arrangement. NGC transferred tax losses of $12.2 million to AGL and was immediately paid $4 million, representing the 33c in the dollar tax effect.

Duncan Saville Duncan Saville is bringing another esoteric investment to the New Zealand sharemarket.

Saville, who brought ERG to Utilico, is hoping to convince Dairy Brands shareholders to approve the purchase of Hemscott, a London-based supplier of stock exchange information. Hemscott is listed on the Alternative Investment Market of the London Stock Exchange.

If the transaction is approved at a special meeting in Wellington tomorrow - Saville controls 81.5 per cent of Dairy Brands and he cannot vote these shares on one of the major resolutions - the NZSE listed company will have made a remarkable transformation. It has sold its NZ dairy farms and its future performance will be dependent on the level of interest in London-listed companies.

The important resolutions at tomorrow's meeting are:

* A special resolution, which requires a 75 per cent majority, that will allow Dairy Brands to exercise a call option to buy 14.06 per cent of Hemscott.

* A special resolution that will allow Dairy Brands to exercise a call option to buy 36.32 per cent of Hemscott from parties associated with Saville. Saville cannot vote his 81.5 per cent on this motion.

* An ordinary resolution, requiring a 50 per cent majority, that will allow Dairy Brands to issue more shares under a full takeover offer it intends to make for Hemscott.

* An ordinary resolution to transfer the company's listing from the main board of the NZSE to the proposed Alternative Exchange (AX). It is also proposed to have Dairy Brands listed on the Alternative Investment Market in London.

The call options will be exercised at either 15 pence per Hemscott share or three Dairy Brands shares for every five Hemscott shares. Dairy Brands will then make an offer for all the remaining Hemscott shares on the same terms. In each instance the vendors rather than the purchaser will decide whether they want to be paid in cash or Dairy Brands shares.

Hemscott acquired a back-door listing on the Alternative Investment Market in August 2000. Its shares have traded at 30 pence but they are now worth 17.5 pence.

The company has a huge database of UK listed companies that is distributed in hard copy or electronically (www.hemscott.com). Its performance, from a financial point of view, has been disappointing. Hemscott reported a loss of £2.4 million ($6.7 million) for the December 2002 year, a reduction on the £3.9 million loss in the previous year.

Saville is attracted by the £7.2 million of cash reserves held by the company at the end of last year. This compares with its sharemarket capitalisation of £5.6 million at 17.5 pence.

It is difficult to forecast the outcome of any of Saville's investments and Hemscott is no exception. The company's income is dependent on the level of interest in UK listed shares and as this remains depressed Hemscott is unlikely to report a profit in the short term.

A disturbing feature of tomorrow's meeting is the proposal for Dairy Brands to move from the main board of the NZSE to AX. Saville has shown a reluctance to adopt a full disclosure regime while listed on the main board and any proposal to transfer Dairy Brands to a market where disclosure requirements are more relaxed should be strongly opposed by shareholders.

* Disclosure of interest: none.

* Email Brian Gaynor