Two major reports were released this week, one by the Commerce Commission on Auckland, Wellington and Christchurch airports and the other by the Securities Commission on Wakefield Hospital.
The airport report sent shudders through the sharemarket, although it is unlikely to have any serious long-term implications for Auckland International Airport.
The Wakefield
Hospital report is a staggering insight into the commercial naivety of that company's directors.
The commission has identified possible breaches of securities laws and has indicated that the Companies Office and/or shareholders may have a case to bring against the company and/or its directors. Successful legal action would have serious implications for the hospital group and its directors.
The airport report, which investigates whether price controls should be imposed on the airfield activities of the three airports, was requested by Jenny Shipley's National Government in May 1998. It was commissioned by Commerce Minister John Luxton in response to concerns by National's junior coalition partner, New Zealand First.
The commission recommended to the Government, by three votes to two, that the airfield activities of Auckland Airport should be price controlled. The supporting commissioners were John Belgrave, Paula Rebstock and Denese Bates. Those opposed were Peter Taylor and Donal Curtin.
The commissioners recommended that no controls be placed on Wellington or Christchurch airports.
The issue, which is complex and technical, is based on the valuation of the airfield assets. Auckland Airport values these assets on an optimised depreciated replacement cost basis at $311 million, but the commission values them at $190 million on a historic cost basis.
The valuation argument is important because the commission believes that the airport should be restricted to a maximum return on assets, and because the airport overvalues its assets its landing charges are too high.
Price controls will cost Auckland Airport $4 million a year, with $2 million going to administer the price control procedure and the remaining $2 million passed on to airline companies as lower landing charges.
The initial response to the report was dramatic as Auckland Airport's share price plunged 19c to $3.97. But since then it has steadily improved to close yesterday at $4.18.
Price controls on landing charges will not have a big impact on Auckland Airport because the company has successfully diversified its earnings base under chief executive John Goulter's astute leadership.
Retail and property rental income accounted for 39 per cent of group revenue in the June 2001 year compared with only 27 per cent from airfield activities.
Commerce Minister Paul Swain has called for submissions on the report and these are due by September 6.
After a study of these submissions, the Cabinet will decide whether to recommend to the Governor-General that price controls be introduced at Auckland Airport.
The mechanism under which these controls will be applied will then be the subject of another report by the Commerce Commission.
The uncertainty over the outcome of this process will adversely affect the proposed sale of Auckland City's 25.7 per cent airport stake. But Auckland Airport shareholders should not be concerned; the company has aggressively developed its non-airfield activities and continues to have excellent growth prospects, regardless of the final outcome of the profit control inquiry.
Wakefield Hospital
The Wakefield Hospital report is about a totally different issue, the commercial naivety of its directors.
The study is littered with the following comments: "the offer document for the IPO was misleading", "the directors did not undertake adequate financial due diligence" and "the offer document failed to describe the risks".
The story began on August 6 last year, when the Wellington-based hospital issued a prospectus for the sale of 3.3 million shares at $2.50 each.
The chairman was John Calder, a Tauranga orthopaedic surgeon. His fellow directors were chief executive Richard Barnes, John Aburn, Mark Frundorfer, Graham Hare, Michael Morris and Richard Stubbs.
The board and management forecast a net profit of $1.965 million for the March 2002 year, compared with $1.712 million for the previous year.
On November 16, just two months and 10 days after listing, Wakefield announced a net profit for the six months to September of just $417,000 compared with $1,041,000 for the same period the previous year.
Directors warned that the full-year result would "be about 50 per cent of the figure forecast when the company was floated".
Calder went on the offensive when the result was criticised by the Business Herald.
He wrote: "Wakefield Hospital's prospectus detailed all significant risks and warned investors not to rely unduly on the financial forecasts.
"It warned of significant uncertainties, many beyond Wakefield's control.
"I believe the prospectus contained all the financial and non-financial information necessary to give investors a sound basis to assess the company."
The Market Surveillance Panel found that Wakefield had inadvertently breached Listing Rule 10.1 by failing to make timely disclosure of relevant information to the market.
It expressed concerns over the soundness of the prospectus forecasts and referred the issue to the Securities Commission.
The commission's report, which should send shivers down the spine of new issue participants, places a great deal of emphasis on Wakefield's arrangement to provide cardiac surgery for the Capital Coast District Health Board.
Since February 1999 Wakefield carried out cardiac surgery for the health board under a series of individual agreements. But the board was losing about $11,000 a patient and decided to end the agreement from June 30 last year.
The board's chief executive conveyed this information to Wakefield and it was also contained in board documents, which are available to the public.
Wakefield's directors disregarded these communications because they believed that the health board's waiting list was growing rapidly and it would be forced to use the private hospital to reduce the list.
From the beginning of the March 2002 year there was a sharp downturn in cardiac surgery referrals from the health board.
At the July 2001 board meeting, directors were told that revenue for cardiac surgery for the first quarter was down 33 per cent on the previous year and the $1.9 million profit forecast would not be achieved unless there was "a sustained upturn in business ... and this probably requires a significant volume of subcontracted cardiac surgery".
At the August board meeting, which was in the middle of the public offering, directors were told that the results for the first four months were "disastrous".
Operating earnings were 70 per cent below budget and no cardiac surgery had been referred by the health board since July 1.
The commission came to several conclusions:
* The prospectus was misleading because it did not disclose that the profit forecasts were based on the assumption that there would be significant revenues from publicly funded cardiac surgery when the health board had decided otherwise.
* The profit forecasts were based on assumptions that were no longer supportable when shares were issued to the public.
* Wakefield's failure to engage an outside party to carry out financial due diligence or to conduct a structured internal process "contributed to the offer document being likely to mislead prospective investors".
Under section 37A(1)(b) of the Securities Act, a security must not be allotted if the investment statement or registered prospectus is known to be false or misleading. If an allotment of securities is made in contravention of section 37A then the allotment is voidable if the subscriber gives notice in writing to the issuer.
As the commission is of the view that the offer documents were misleading, shareholders should write to the company before September 6 and apply to have their original subscription of $2.50 a share returned.
The company will probably reject these claims and shareholders will have to take legal action to get their money back. Shareholders could use the company's annual meeting on August 30 to form an action group to take legal action against the company and its directors.
The Commission believes that shareholders have a strong case and they should not miss the opportunity to hold directors accountable.
* Disclosure of interest: none.
* bgaynor@xtra.co.nz
Two major reports were released this week, one by the Commerce Commission on Auckland, Wellington and Christchurch airports and the other by the Securities Commission on Wakefield Hospital.
The airport report sent shudders through the sharemarket, although it is unlikely to have any serious long-term implications for Auckland International Airport.
The Wakefield
AdvertisementAdvertise with NZME.