Air NZ investors have little choice - report

By Phil Boeyen, ShareChat Business News Editor

Wednesday 5th December 2001

The Crown's proposed recapitalisation of Air New Zealand (NZSE: AIRVA) has been deemed fair by independent advisor Grant Samuel although it admits shareholders have little choice in the matter.

Under the recapitalisation New Zealand taxpayers will inject $885 million into the embattled airline in return for an 82% stake and there is the promise of another $150 million if it's needed.

Grant Samuel has estimated the airline's market value of net assets at between 15 and 37 cents per share and says that the weighted average issue price of the Crown shares, at 25.9 cents per share, is within those parameters.

However the advisor admits that shareholders are effectively left with "Hobson's choice" given the prospects for the airline without a significant cash injection.

"The ability to raise new sources of debt or equity is severely constrained in the short term due to Air New Zealand's high gearing, poor credit rating, current operating performance, the state of the international industry, ownership restrictions and the stance of the current major shareholders and lenders to the company," the report states.

"If the proposed recapitalisation is not implemented it is likely that Air New Zealand will face statutory management or possibly legislated nationalisation. In these circumstances shareholders would almost certainly realise no value for their shares. On these grounds alone the proposed recapitalisation is fair and reasonable."

The report says that while the recapitalisation will improve the airline's ability to conduct its business effectively, shareholders must recognise that the it will not be in a financial position to sustain any further material extended downturn in business or other adverse impact.

" The airline industry globally is undergoing a period of rationalisation, featuring mergers, bankruptcies and the growth of the value based airline format.

"Air New Zealand's ability to adapt to these changes and take advantage of the opportunities that will arise will be critical if it is to again become a profitable and sustainable business."

Among the factors in the airline's favour are that its domestic and engineering businesses produce strong earnings and cash flows, forward bookings are strong and improving with the exception of the Japan and US markets, and fuel prices have reduced.

The report also points out that Air NZ has a young fleet when compared with other major airlines, requiring only maintenance expenditure in the medium term.

However on the negative side the report notes that the company is likely to face increasing competition from Qantas and/or Virgin Blue in the domestic and Tasman markets.

It also says there is potentially increased competition from Sinagapore Airlines and Hong Kong-based Cathay Pacific on the international market as those companies redirect surplus capacity from the USA into the more buoyant Asian market.

Grant Samuel says that by agreeing to the recapitalisation Air NZ shareholders retain upside exposure but adds that it is unlikely the airline will have the capacity to pay dividends in the short to medium term "as it will be necessary to direct cash generated from operations and asset sales to retire debt."

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