Forum Archive Index - March 2000

[frank fernandez <frank.fernandez@xtra.co.nz>]

Hi all,
The smart money has to be on AIRVB from here on as investors wait for a
positive outcome to the ongoing Air New Zealand/Brierley/Singapore
Airlines negotiations - or the bid by Qantas in wanting to buy a stake
in AirNZ.  

The Qantas bid appears to be straightforward - a desire to buy BRY's 17%
B shareholding in AirNZ in an attempt to block a possible heavyweight
alliance between SIA and AirNZ.  

But the SIA bid has seen conflicting media reports in the last two weeks
which may have left investors a bit confused. And perhaps this may
explain the current 'wait-and-see' attitude towards the AIRVB stock
which today was still trading between the $2.39-$2.40 range.  

If a deal were to go ahead, and there are no reasons to assume why it
would not, AIRVB would be in 'premium' territory considering that a
price of $3.00 for the stock has reportedly been set by BRY in its
negotiations with SIA. Only a year ago (before the AirNZ shares started
losing favour with investors), AIRVB was trading around the $4.15 mark.

I believe that a deal between SIA and BRY will soon be struck but to
better understand the rationale behind this conclusion, it is necessary
to analyse the background, the companies involved (directly or
indirectly), and the principals involved in attempting to negotiate the
deal. 

These are the facts of the matter:

1. SIA wants to purchase a 25% foothold in Air NZ through Brierley's 47%
stakeholding which is made up of 17% 'B' shares and 30% 'A' shares.
Because BRY can only deliver 17% of B shares to SIA in any deal, the
remaining 8% or 46 million shares (required to make up the 25% buy)
would either have to be arranged through BRY doing a swap on its A
shares with institutional investors, or buying B shares directly from
shareholders, or making a stand in the market (similar to Telecom in the
INL case). 

The swap option does not appear to be a problem and one of New Zealand's
largest fund providers, AMP Asset Management (with 5% of AirNZ shares -
A&B shares) have publicly said they would favourably entertain such a
swap. BRY have also issued a notice stating it would pay between $2.50
to $3.00 for AIRVB shares.

2. It is known that SIA is keen to increase its possible stakeholding in
AirNZ to 40% but have been advised that this is not allowable under
present governmental policy. However many analysts are of the opinion
that the 40% bid had been brought up deliberately to 'test' the
political boundaries. Reports from Singapore indicate that SIA's
acquisition of a stakeholding in Air NZ really hinges on the carrier
being allowed management say.  

Singapore aviation experts have said that if SIA is given that
management say, the stake will matter little. Seah Hiang Hong, analyst
at Kim Eng Securities in Singapore, had this to say: "SIA's target is to
simply obtain influence on the Air NZ board. I don't think SIA needs 40
percent. They only need 25 percent as long as they can call the shots in
Air NZ. I think it can be worked out." 

Another aviation analyst has pointed out that a similar scenario already
existed in Australia with British Airways owning a 25% stake in
Australia's flag carrier Qantas but having management say.

3. The restrictions on foreign shareholding means that SIA would have to
depend on key shareholder Brierley's support to gain management
influence in Air NZ. And this is should not be a problem when one
considers the composition of the boards concerned. Sitting on the
Brierley board are Sir Selwyn Cushing (Chairman), Greg Terry, Sir Ron
Brierley, Philip Burdon, Tan Sri Quek Leng Chan, Quek Poh Huat and Wong
Kok Siew. For those who are not aware, BRY is 34% (at last count) owned
by Singaporean and Malaysian interests. 

Singapore Airlines, in turn, is principally owned by Temasek Holdings,
the Singapore Government's premier investment holding company. Quek Poh
Huat, who sits on the BRY board is the President of Temasek Holdings.
Wong Kok Siew, another BRY director, also holds directorships on the
boards of companies owned by Temasek Holdings. BRY's representatives on
the Air NZ board of directors are Sir Selwyn Cushing (also the Chairman
of AirNZ), Greg Terry and Philip Burdon. 

With a common thread running through such directorships, it would be
inconceivable to believe that SIA would be denied management influence
in the running of AirNZ's affairs whether the stake taken by SIA is 17%
or 25%. There has also been heavy buying of BRY shares over the last
week - purportedly to be stemming from Singaporean interests. One
possibility is an attempt to increase Singaporean stakeholding in BRY
prior to SIA taking a stake in AirNZ - which will further assist in
ensuring greater management say in the running of AirNZ.

4. It must be realised too that SIA's interest in Air NZ is not in the
carrier itself but in its wholly-owned subsidiary Ansett Holdings,
Australia's second-largest carrier. SIA had wanted to buy half of Ansett
from News Corp last year but failed when Air NZ refused to give up its
first-refusal rights. SIA has been seeking direct access to the
Australian market for more than a year, and a closer alliance with Air
NZ would give it a stronger foothold in the Asia-Pacific aviation
market. 

For SIA, owning half of Ansett fits snugly into its strategic whole.
Buying into Air NZ would give SIA a foothold into Australia's Ansett
Airlines and a greater share of the Australian/New Zealand market, which
already contribute about 13-15 percent of SIA's revenues. With a strong
shareholder such as SIA, aviation analysts expect Ansett to take a
greater share of the Australian market from dominant player, Qantas.

5.  In considering a partnership with Virgin Australia,  SIA would also
be mindful that its no-frills fleet of 10 leased aircraft would be
dwarfed by Qantas and Ansett's combined fleet of around 130 aircraft.
Market analysts have already said that it would be a fair time before
the new airline achieves substantial market penetration, let alone turn
a profit - something that SIA would be well aware of.

6.      Singapore aviation analysts have pointed out that the "no frills"
image of the start-up Virgin Australia operation does not "gel" with the
SIA image - an important consideration to take into account when SIA
considers reputational risk issues in joining with Virgin Australia.

7.      Commercially it is also not in Air NZ's interest to fend off SIA.
Air New Zealand and Ansett Australia do not have the critical mass,
route capability or capital to create the route synergies given that
Qantas and BA together are a pretty heavy-duty competitor. Throw in
Virgin Australia and you have an added ankle-biter. Singapore Airlines
is the obvious fit and if Air New Zealand passes up the opportunity,
unless a deal is struck with another bidder such as Qantas, it will
remain a secondary player in the region. 

Both AirNZ and SIA also already have an advantageous code share
relationship and the Kiwis stand to gain much from SIA's industry and
management expertise. Air NZ and Ansett are also members of the global
Star Alliance which SIA has firm plans to join in April. 

8.      Air New Zealand also cannot afford to pay NZ$725 million cash (to
News Corp) for the rest of Ansett Holdings without tying itself and
Brierley Investments up in ruinous debt. There is the question too of
funding the replacement of the Ansett Australia's aging fleet. 

As part of the deal with News Corp, AirNZ has to pay a top-up to News
Corp within two to four years of Air New Zealand shares equivalent to
10.5% of the company. Seeing AirNZ can only do this through
short-supplied B shares, the most probable outcome would be a need to
find another $100 million in cash. 

If a deal with SIA (or some other interested party) is not struck, the
only way AirNZ and BRY can raise the necessary capital would be through
a rights issue. And judging by the response (read: lack of it) from
shareholders in recent times to the AirNZ shares, it is very unlikely
that this would be successful.

9.      In the world of big finance deals, anything and everything seems
possible. One analyst has suggested that a creative investment banker
might even be able to structure a deal which would perhaps place Ansett
Australia as a separate operation outside the total AirNZ basket which
will then allow SIA to own up to 47% of Ansett Australia but only 17% or
25% of the parent company AirNZ. 

10. If SIA's preferred option was to join Virgin Australia, it would not
have gone to the trouble of negotiating with AirNZ and BRY in the past
couple of weeks.  Furthermore SIA has not declared its intentions to
Virgin Australia yet. 

Although Qantas have indicated today that they are prepared to pay an
appropriate price to get a stake in AirNZ, I believe for the reasons
detailed above that SIA will have first call on a stake in AirNZ and
will strike a deal to take a minimum 25% stakeholding in AirNZ. The
Brierley shareholders meeting in Singapore today gives the principals
involved in the discussions the opportunity over the next few days to
work out the finer details of such a deal. 

As usual, just my thoughts (albeit lengthy but necessarily so) and
something to include in your investment deliberations for the rest of
this week.

Cheers,

Frank Fernandez

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