The battle for control of Auckland International Airport (AIA) is a real humdinger. It contains a cocktail of important issues including the argument over the sale of strategic assets to foreign interests, our lack of savings, and the role of the New Zealand Superannuation Fund, AIA board of directors, Auckland City Council and Manukau City Council.
The drama took an unexpected turn on Wednesday when the Canada Pension Plan Investment Board (CPPIB) announced its intention to make an offer for 40 per cent of AIA at $3.6555 a share.
This compared with Tuesday’s closing price of $2.91 and CPPIB’s proposed $3.70 a share partial bid revealed on September 19.
The cash option has been reduced since September 19 because AIA paid a 4.45c dividend on October 19.
The first point to note is CPPIB’s claim that it only wants a minority stake is spurious because 40 per cent represents effective control of AIA.
Forty per cent gives control because a large percentage of shareholders do not vote. At the high profile 2006 and 2007 Contact Energy annual meetings, which included votes on controversial directors Phil Pryke and Tim Saunders, only 69.1 per cent and 66.4 per cent of shares respectively were voted.
As AIA has 50,500 shareholders, and it is highly unlikely that more than 75 per cent would ever vote, then a 40 per cent shareholding would give CPPIB almost complete control of the airport.
In addition, takeovers codes, which have been carefully constructed to ensure there is a contestable process when effective control is acquired, have determined that in excess of 20 per cent is the key control figure. A notable exception is the UK Code, which has 30 per cent or more as effective control.
The New Zealand Takeovers Code has determined that effective control is achieved once a shareholder goes beyond 20 per cent. In order to achieve a decisive outcome the Code determines that a bidder must reach 50.1 per cent. If the bidder doesn’t reach 50.1 per cent it must return accepting shares so that it holds no more than 20 per cent of the target company once the offer is complete.
The one exception to this fundamental requirement is Rule 10(1)(b) of the Code.
Under this provision CPPIB will have to send a voting paper to shareholders with its partial offer. The partial offer will only be validated if more than 50 per cent of shares cast vote in favour of allowing CPPIB to acquire 40 per cent of AIA.
Thus CPPIB has to achieve two clear objectives;
* It must receive acceptances for at least 40 per cent of shares on issue.
* At the same time, the partial bid must also be approved by more than 50 per cent of shares cast in the ballot.
This procedure has only been used once previously. That was in 2004 when H&G, a company controlled by Sir Selwyn Cushing, made an offer for 40.8 per cent of Rural Equities. Sir Selwyn reached his target after raising his offer from $1.25 to $1.50 and then to $1.60 a share.
A total of 6.22 million shares, or 42 per cent of the shares on issue, were cast in the ballot with 63.8 per cent voting in favour of the 40.8 per cent offer, and 36.2 per cent against.
The originators of the Code included Rule 10(1)(b) to allow shareholders to approve an offer for less than 50 per cent of a company when there were compelling reasons to do so. Shareholders would be crazy to accept an offer for only 40 per cent of their shares, and give away the share premium on their remaining holding, unless the bidder outlined a compelling strategy to justify this.
The Canadians have failed miserably in this regard as up to this point they are full of talk and short on facts. CPPIB executives and Consultus, their public relations advisers, have bombarded the media with phone calls promoting CPPIB’s position but they have been reluctant to answer specific questions.
The response of Andrew McKenzie, general manager of finance at Auckland City Council, has been quite bizarre. McKenzie issued a press release effectively supporting CPPIB’s offer as it “appears to meet several of the council’s key objectives and criteria in relation to any future restructure of Auckland Airport and to offer significant value for all shareholders”.
The originators of the Takeovers Code would never have imagined that a sophisticated investor would support a bid for only 40 per cent of a company before the full details of the bidder’s strategy for the target company had been released.
Another issue raised by the AIA offer is the inability of a New Zealand pension fund to make a counter offer for the country’s main international gateway because of our lack of savings.
Airports are excellent investments for long-term orientated pension funds because these companies also have a long-term focus and earnings are relatively assured.
The preferred situation would be to keep the airport under New Zealand control because a domestic owner would be much more aware of the importance of the company and the issues affecting it.
But a 40 per cent interest in AIA at $3.6555 a share will cost $1.79 billion or 13.6 per cent of the total value of the NZ Superannuation Fund. The Super Fund is not allowed to take a controlling interest in any company under Section 59 of the New Zealand Superannuation and Retirement Income Act 2001 and, even if it was, it would be imprudent to commit more than 10 per cent of total funds to one investment.
CPPIB is far bigger – it has total funds of C$120.5 billion ($167.4 billion) compared with NZ Super Fund’s $13.2 billion – and the 40 per cent AIA stake would represent only 1.1 per cent of its total assets.
But the most important question is what will happen as CPPIB gets bigger and bigger, particularly as it is an arm of the Canadian government. CPPIB funds under management are expected to grow to a huge C$1432 billion by 2050. At that point the 40 per cent stake in AIA, at $3.6555 a share, would represent only 0.09 per cent of total assets.
How can CPPIB avoid becoming a bloated and inefficient bureaucracy? What kind of attention will Auckland International Airport receive when CPPIB has far bigger investments to manage?
The more interesting developments regarding AIA have yet to come.
At the annual meeting on Tuesday November 20, Richard Didsbury, who has been nominated by 12.75 per cent shareholder Auckland City Council, John Brabazon, nominated by 10.5 per cent holder Manukau City Council, and Lloyd Morrison, nominated by 7.79 per cent holders Infratil and the NZ Super Fund, are standing for the board.
The outcome of this meeting is important because AIA’s directors will not make a recommendation on the CPPIB offer until after November 20.
As the current board has already rejected CPPIB’s restructuring proposal and a majority of the new directors, if elected, will be opposed to the offer then it is highly unlikely that a new board will recommend acceptance.
But this may not be the end of the drama. AIA is now in play and the prospects of another offer cannot be discounted.
There is a great deal of pressure on Morrison and the NZ Super Fund to come up with an alternative deal. But the Super Fund’s options are restricted because it cannot take a controlling stake in AIA whereas its Canadian counterpart can.
This ridiculous situation has to be corrected.