The proposed sale of a controlling stake in Auckland International Airport to Dubai Aerospace Enterprise (DAE) has reignited the debate over foreign ownership.
At one extreme are the xenophobes who believe that strategic assets must remain under New Zealand control. At the other are those who believe we should sell everything to overseas interests if the price is right.
The latter group has been in the ascendancy over the past two decades, which is in stark contrast to most other countries.
There are two main types of foreign investment:
* Direct investment in new “greenfield” operations.
* The purchase of existing companies.
Most countries make a big effort to attract overseas greenfield investments, particularly those that will make a strong contribution to export and economic growth.
Ireland has been especially successful in this regard. It has attracted 980 foreign companies that have established new operations employing 135,500 individuals and generating €74 billion ($128 billion) of exports. Most of these new activities are in the international financial services, information technology, pharmaceutical and engineering sectors.
These foreign investments have made a significant contribution to Ireland’s extraordinary economic growth since the early 1990s.
New Zealand’s approach has been totally different. The Government has a relatively low-key approach towards greenfield foreign investment and doesn’t offer material incentives because they would distort the so-called “flat playing field”, particularly as far as tax is concerned.
As a result we have attracted relatively little foreign greenfield investment.
Most Western countries do not discourage the purchase of existing companies by overseas interests, although there are usually some restrictions regarding strategic assets. For example Australia has had overseas ownership caps on major airports, Qantas, media companies and the four large trading banks.
We have no restrictions on overseas ownership and have had no reservations about selling strategic companies to the highest bidder, regardless of their ability or country of origin.
Our first major privatisations – Petrocorp, PostBank, Air New Zealand, State Insurance Office, Telecom, Bank of New Zealand and the Forestry Corporation of New Zealand – realised $9.6 billion for the Crown, with 77 per cent of the proceeds coming from foreign trade buyers.
By comparison, the early privatisations in Australia realised A$95 billion with only 26 per cent generated through foreign trade sales. Most of the large Australian privatisations, particularly Commonwealth Bank and Telstra, were sharemarket floats whereas Telecom New Zealand was sold to American interests, which then sold down a 31 per cent interest through a sharemarket float, before eventually selling out altogether.
We have sold a large number of our major companies to overseas interests because of our tiny savings pool and “free-market” economic policies. The NZX has the highest percentage of overseas ownership of any Western sharemarket and major decisions regarding the economy are more likely to be made in Sydney than in Auckland.
John Stewart, CEO of Bank of New Zealand owner National Australia Bank, recently told the Australian Financial Review that the Australian Government shouldn’t allow foreign takeovers of the four main banks because “Australia might end up as a branch economy, not dissimilar to the way New Zealand is now”.
The major issue as far as New Zealand is concerned is the experience and ability of the purchasers of strategic assets, regardless of whether they are domestic or foreign, and the price they are willing to pay.
In this regard we have made some dreadful decisions including:
* The Crown sold New Zealand Steel to Equiticorp when the purchaser was close to insolvency.
* Air New Zealand was sold to a consortium led by Brierley Investments when the investment company had no major airline experience. It then ran the national carrier into the ground.
* The American investors put a high priority on extracting cash from Telecom and the country’s telecommunications infrastructure has never fully recovered from this underinvestment.
* Tranz Rail was purchased by a Fay, Richwhite/Wisconsin Central Transportation consortium that gave assurances it would develop the company’s passenger network. This promise was not fulfilled, the company almost collapsed and was effectively bailed out by Toll Holdings and the Crown.
* The Government sold a 27 per cent stake in the Bank of New Zealand to the Fay, Richwhite-controlled Capital Markets. Three years later the bank had serious problems and was sold to National Australia Bank for a fraction of its current value.
* Government Printing Office was sold to Graeme Hart for the proverbial song and was the catalyst for his extraordinarily successful business career. Hart got another major boost when he was able to acquire Carter Holt Harvey on extremely favourable terms after it had been poorly run by its US controlling shareholder.
A major issue with Auckland International Airport is not whether the prospective controlling shareholder is domestic or foreign but whether it has the experience and skills to run the country’s most important airport.
Dubai Aerospace Enterprise was formed in February 2006 with capital of US$1.05 billion. The company, which is controlled by the Dubai Government, is planning to invest in a large range of aerospace industries.
But it is still in the start-up stage and generated no revenue in its December 2006 financial year.
The problem with DAE is that it has no track record and will not disclose any financial information because it is a private company. Its airports division comprises Kjeld Binger, who is based in Dubai, and eight other former Copenhagen Airport executives based in Denmark but it has no operations at present.
How can we be sure that a DAE-controlled Auckland Airport won’t be a repeat of Telecom, Tranz Rail, Air New Zealand, Bank of New Zealand and Carter Holt Harvey?
The airport has performed extremely well under domestic ownership and there is nothing to suggest that DAE will do a better job.
What will happen if there if there is a downturn in the Dubai economy or the political situation in the Middle East deteriorates? DAE has shareholders with a heavy exposure to the Dubai property boom and these parties could have a strong incentive to extract cash from DAE, and Auckland Airport, if property prices crash.
Retail investors have been strongly criticised for their focus on price (interest rates) and their total disregard for risk following the Bridgecorp collapse. But are sophisticated shareholders and directors any different?
When the Crown sold Air New Zealand, Bank of New Zealand, New Zealand Steel, Tranz Rail and Telecom, it was only interested in the price. It showed little concern for the risks associated with selling strategic assets to parties that had no proven skill in managing these assets. This naive approach has proved to be extremely costly for the domestic economy.
DAE has undertaken due diligence on Auckland Airport, but what due diligence did the target company directors undertake of DAE before unanimously recommending the deal?
Auckland International Airport’s share price signifies that investors have concerns regarding shareholders’ support for the deal as well as DAE’s operating capabilities.
The $3.80 a share offer comprises $2.34 cash, a 7c final dividend and $1.39 worth of stapled securities in Auckland Airport. DAE will pay $1.83 for these stapled securities but the market effectively valued them at only 91c at yesterday’s closing price of $3.32 a share.
The low share price indicates that Dubai Aerospace Enterprise has a long way to go before it convinces Auckland International Airport shareholders that it has the operating capabilities, or is offering a high enough cash price, to obtain a controlling stake in the country’s major international gateway.