Sensitive Air NZ details remain under wraps

By Phil Boeyen, ShareChat Business News Editor

Wednesday 10th April 2002

The government has released a slew of documents relating to its recapitalisation of Air New Zealand (NZSE: AIR) last year but has not disclosed how much it originally wanted to pay for the shares.

In the heads of agreement announced in October the government agreed to a first cash injection of $300 million with shares issued "at a price per share equal to the lesser of: (a) 24 New Zealand cents; and (b) the price per share at which the Tranche B shares are issued."

The Tranche B shares were covered by a cash injection of up to $585 million and were to be issued at either 24 cents or "such higher or lower price as the Crown may decide represents fair value" after it had completed due diligence.

In the documents released Wednesday there is a copy of a letter written by Finance Minister Michael Cullen to Air NZ on November 23 last year advising what share price the government was prepared to pay, however the figure has been blanked out.

In the letter Dr Cullen says "the share price has been arrived at after careful consideration of all relevant factors" and notes that "without the Crown support Air New Zealand would be in financial distress, unable to fund its activities and its shares would be worthless."

Dr Cullen's first letter is likely to have been based on a report from investment bankers Cameron and Company dated November 8.

Once again, all valuation figures have been blanked out in the public version of the report but it does refer to Air NZ's share price at the time.

"The current share price of 28 cents provides a benchmark, but we believe it is significantly influenced by the earlier signal in the market of 24 cents as provided in the recapitalisation announcement. The 24 cents price was itself based on an "uninformed" market and no due diligence."

In the report Cameron and Company also identified six key risks facing Air New Zealand, including that "even after an $885 million recapitalisation, Air New Zealand will remain highly geared (81%) and unable to withstand downside financial shocks."

However all of the five other risks have also been withheld from the public.

Air New Zealand obviously objected to the initial bid price and the acting chairman at the time, Jim Farmer, wrote to Cameron and Company on November 25 to say that the government's offer might be reasonable in the circumstances but was not fair.

"The board is grateful for the support of the Crown and acknowledges that without that support the company would now be in statutory management and its shares would be worthless.

"On that basis, an issue price of 1 cent per share could be regarded as reasonable. However the statutory test is both "fair and reasonable"."

Dr Farmer goes on to tout Air NZ's brand, reputation, infrastructure and the profitability of its domestic operation.

"As conveyed to you by Mr France, the board believes that a final price in the 26-29 cent range...would better satisfy the "fairness" test. Moreover we believe it would provide a more satisfactory outcome for the company, its existing shareholders and the Crown."

The next day Dr Cullen again wrote to the airline confirming the eventual outcome of the negotiations - that the government would pay 24 cents per share for the first $300 million in funding and 27 cents per share for its second injection of $585 million. In that letter he also promised further funding of up to $150 million by June 2003.

In making the details public the government notes that "some deletions have been made to the papers in order to protect commercially sensitive information that could prejudice Air NZ if acted on by certain interested parties (eg competitors)."

Full details of the documents are available from The Treasury website at:
http://www.treasury.govt.nz/release/airnz/oct-dec01.asp.

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