Brian Gaynor: Tranz Rail bailout hurts investors

It is now clear that Finance Minister Michael Cullen inadvertently bailed out Tranz Rail at the end of last year and his action harmed a large number of New Zealand investors.

On Christmas Eve, the Government announced that it would buy the Auckland rail corridor for $81 million, the first $75 million to be paid immediately and the remainder subject to a satisfactory conclusion of negotiations over train control and track maintenance.

This was a huge cash windfall for Tranz Rail and it also allowed the company to book a $58 million profit yet continue to have full access to the track.

The transaction had a positive impact on the group's share price and allowed Wisconsin Central to sell its 23.7 per cent stake at $3.70 a share and Fay Richwhite its 14.5 per cent holding at $3.60. New Zealand investors were big buyers of these shareholdings and have suffered huge losses as a result.

There is little doubt from last week's bank loan renegotiation that Tranz Rail would have gone under, or be in serious trouble, if the Government had not made its overly generous $81 million purchase. It also demonstrates that Sir Michael Fay and David Richwhite still have the rub of the green, as this is the second time one of their major investments has been resuscitated by the Crown.

At yesterday's closing price, Tranz Rail has a sharemarket value of $201 million, including the $66 million rights issue contribution.

When the equity injection and profit from the sale of the Auckland rail corridor are excluded, the group has a theoretical market value of just $77 million.

If Finance Minister Cullen had been a little more patient he could have bought 100 per cent of Tranz Rail for little more than the price of a few kilometres of Auckland railway track.

AIR NEW ZEALAND

Air New Zealand's public relations blitz on its proposed relationship with Qantas has raised as many questions as it has answered. One of these is the profitability of its different operations.

Air New Zealand has always been reluctant to disclose specific figures but the airline revealed in its 2001 annual report that domestic operations achieved an operating profit (earnings before interest and tax) of $149.3 million and its international operations, excluding Ansett, lost $50.9 million.

Chief executive Ralph Norris stated a number of times this week that Air New Zealand's international operations lost $230 million in the June 2002 year, a substantial increase on the loss recorded in the previous year.

What is this figure based on and what does it mean? Does it indicate that the group's New Zealand operations achieved an operating profit in excess of $200 million for the June 2002 year? If so Air New Zealand's domestic operations are extremely profitable as it flies nearly eight times further on international routes than it does in New Zealand.

Why would the Commerce Commission allow a hugely profitable domestic operation to get into bed with its main competitor and substantially diminish the prospect of another airline entering the New Zealand market?

It also raises the question whether Norris should selectively release profit figures to the media when they have not been revealed to shareholders or the Stock Exchange.

The selective release of data by Air New Zealand makes it extremely difficult to assess the Qantas proposal.

We will have to wait until the national airlines release more detailed information to the public, or their applications to the Australian and New Zealand competition watchdogs are made available, before a full assessment of this deal can be made.

VERTEX

Vertex shareholders will be looking for some good news today when the company announces its results for the six months to September 30.

Vertex was listed on July 1 following the sale of existing shares to the public at $2.05. On September 4 it announced that revenue for the six months to September 30 was expected to be 10 per cent below forecast and operating earnings (earnings before interest and tax) would fall short by 15 per cent.

Directors expected full-year revenues to be in line with forecast but operating earnings to be $10.1 million instead of the prospectus forecast of $11.2 million. But the good news was that the company expected to pay a fully imputed dividend of 14.2 cents for the March 2003 year, 6.1 cents in December and 8.1 cents next June.

The profit warning triggered investigations by the Market Surveillance Panel and Securities Commission and its share price fell to $1.10. Aggressive selling by Axa, which reduced its holding from 13.3 to 4.2 per cent, had a major influence on the share price fall.

But in recent weeks the share price has picked up in anticipation of more positive news today. If Vertex confirms both its September forecasts and the 14.2 cents dividend then at $1.38 it has a fully imputed dividend yield of 10.3 per cent and a prospective price/earnings ratio of 9. This should underpin its share price at current levels.

But if there is a further downward revision in forecasts shareholders have every right to be extremely angry and they will want to know if Axa received any information that has not been made available to all shareholders.

The Market Surveillance Panel's investigation, which is looking at the company's market disclosure, should be completed before Christmas. The Securities Commission, which is looking into the profit forecasts and share trading activity before the September announcement, will not complete its inquiry until next year.

CALAN HEALTHCARE PROPERTIES TRUST

Calan's annual meeting, which is usually a crowded and vocal occasion, should be livelier than usual next week as Bruce Sheppard and his Shareholders Association are due to attend.

Sheppard will be asking questions about the huge fees paid to related parties and the trust's poor performance.

Calan was listed in September 1999 because it wanted to facilitate the purchase and sale of units by shareholders. But the move has not been successful as dividends and the unit price have slumped and the number of unit holders has fallen from 7000 to 5100.

Huge fees paid to related parties, which have averaged $4.1 million over the past four years, are a contributing factor to the sell down.

The Shareholders Association wrote to Calan, asking a number of questions in relation to these fees. Bruce Davidson, the trust's chairman, said he would ask management for a full report on the issue but he seemed to be more concerned about identifying the unit holder that complained to the Shareholders Association.

At last year's meeting unit holders asked questions about related party payments, management fees based on size rather than performance and the trust's focus on developments instead of fully completed hospitals.

Calan's unit holders have extremely limited powers but there are a number of important issues they need to raise at this year's annual meeting, which will be held at the Novotel Ellerslie Hotel at 10.30am on Thursday, December 5.

* Disclosure of interest: Brian Gaynor is a Vertex shareholder.

* bgaynor@xtra.co.nz