Saviour or sucker?

Friday 12th October 2001

CULLEN'S AIR NEW ZEALAND RESCUE ROLE

As the details of the government's Air New Zealand rescue package are absorbed there's an argument doing the rounds of the financial community that the Crown got suckered.

How come, the argument goes, taxpayers are shelling out $885 million to pull our national airline out of the ditch and Brierley Investments and Singapore Airlines get their snouts into the trough?

The debate points up some interesting contrasts between politics and reality.

On September 25, when Prime Minister Helen Clark made her now-famous comments - "I'd recommend [shareholders] hang on to them, I'm absolutely convinced that Air NZ has a viable future" - the airline's shares were worthless.

That much is acknowledged in the Heads of Agreement between the Crown and Air New Zealand. The issue price, terms, and conditions of the $300 million of "tranche A" convertible preference shares (CPSs) "were determined at a time of extreme uncertainty," the agreement notes, "when Air NZ's remaining shareholders' funds were of no or minimal value to its shareholders because they do not provide an adequate capital base for a continuing business."

"For Air NZ the consideration for, and terms and conditions of, the CPSs were the price of a chance for survival" it goes on, "and for the Crown those terms and conditions are the price of an undetermined future risk, including the real risk that the whole of the investment will be lost."

Given this was the Crown's official assessment - only eight days after Clark's comments - of Air NZ's position, it's hard to see how the prime minister came by her professed optimism. It will be interesting to see what the Securities Commission makes of it all. But Shoeshine digresses.

Post-rescue the airline's shares are unarguably worth something. Macquarie Equities values them at around its estimated net tangible asset backing of 24c. Sharemarket punters have been more bullish, buying the shares at upward of 30c.

So the government's rescue, the argument goes, has given value to the stakes held by BIL and SIA that were previously worthless. At 24c BIL's shares are worth $55 million and SIA's $45 million. Joe Public's and institutional shareholders' 7.6% is worth $81 million.

All up that's $181m, or more than 20% of the maximum $885 million the government has committed.

So far so good, but given the government had no choice but to bail out our national carrier, could it have avoided giving value away to BIL, SIA and the minorities?

Yes, argue its detractors.

According to the tongue-wags, late in the piece Air NZ independent directors Ralph Norris and Ron Carter and others were threatening to resign if the government, BIL and SIA couldn't do a deal. They didn't have much choice - under the Companies Act directors can't allow an insolvent company to trade on.

If the independents had gone the remaining directors would have had no choice but to call in the receivers.

At that point, the argument goes, the government could have stepped in and offered the receivers $1 for the whole airline, as Ansett was offered to SIA, and then to the Australian government, for a dollar.

Sure, the government would then have had to pump in capital. But it would have got 100% of the airline for the same outlay plus $1. It had only to let nature and the Companies Act take their courses and it could have avoided a hefty wealth transfer from the taxpayer to BIL, SIA and the minorities.

True, a receivership would have had the potential to inflict serious damage on an already fragile operation. But a government buyout and bailout could have been announced almost in the same breath as the receivership, in which case credit arrangements, leases and supplies need not have been withdrawn or disrupted.

That's what a commercial entity, with only its shareholders' interests to take into account, would have done.

Whether governments in these situations should look out only for their citizen "shareholders'" interests is a matter for philosophical debate. An Air New Zealand receivership and rescue would have triggered for the blameless minorities the loss of the entire value of their investments.

Whether BIL and SIA deserved to lose their stakes is also arguable.

BIL has been slagged widely for mismanaging the airline but it has supported its growth several times over the years by subscribing to rights issues.

The argument in favour of SIA is far stronger.

Right up until August 29, when Gary Toomey finally revealed to his shareholders the appalling true state of Ansett's affairs, SIA had been willing to put in more money - up to $600 million the first time it was knocked back by the government.

Exactly how much value the government will be "giving away" and how much it retains still depends on the price it pays for its preference and ordinary shares.

Detailing Air NZ's hopeless pre-rescue position the Heads of Agreement notes: "It follows that the Crown cannot accept any price for tranche B [the ordinary shares] which may have the effect of giving up any value that the Crown may be perceived ... to have obtained in respect of the CPSs because to do so would imply a value transfer from the Crown to other shareholders in Air NZ."

That suggests the Crown will nominate a pretty low price. And when shareholders vote on the package they won't know what that price is.

As BIL and SIA have pledged to vote in favour, Joe Blow's views will make no difference.

The independent directors still have to "form an opinion that the consideration for the new shares is fair and reasonable to all existing Air NZ shareholders." But, given the airline was valueless before the government stepped in, it's unlikely they'll make much of a fuss.

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