DDay is quickly approaching for Auckland International Airport (AIA) shareholders. The Overseas Investment Office has sent its recommendation on the Canada Pension Plan Investment Board’s (CPPIB) offer for 40 per cent of the company to Land Information Minister David Parker and Associate Finance Minister Clayton Cosgrove. The ministers are expected to deliver their judgment by Friday.
This is a major decision for Parker and Cosgrove, who are ranked 13th and 15th in Cabinet, as the transaction is worth $1.725 billion. In addition it will have a big impact on sharemarket confidence and will influence the way overseas investors view New Zealand.
AIA shareholders will lose more than $600 million, based on yesterday’s share price, if the 40 per cent offer is turned down.
AIA’s story goes back to June 1998 when the Government sold its 51.6 per cent stake to New Zealand and overseas investors.
Winston Peters signed the second page of the Investment Statement in his capacity as Deputy Prime Minister and Treasurer while the IPO’s lead manager was Merrill Lynch, the US investment bank.
One of the Crown’s main objectives, according to the prospectus, was “to maximise the proceeds from the offering”. The prospectus contained seven detailed pages of potential risk factors for new shareholders but there was no indication that the Government considered AIA to be a strategic asset and that it might restrict the sale of shares to a legitimate buyer in the future.
If politicians were opposed to overseas interests obtaining a major stake in the airport then this should have been noted as a risk factor in the prospectus.
Most New Zealand shareholders would have had no problem with this restriction as long as it was clearly outlined when the Crown exited its shareholding.
The IPO was a success – the shares were sold on a historic p/e of 18.7 – and the major post-issue shareholders were Auckland City Council, with 25.8 per cent, Manukau City Council, 9.6 per cent, and North Shore City Council, 7.1 per cent.
In November 1999 North Shore sold its stake to Singapore Changi Airport and in December 2002 Auckland City reduced its holding to 12.8 per cent.
The takeover action began on July 23 last year when it was announced that Dubai Aerospace proposed to acquire between 51 per cent and 60 per cent of the airport. The Dubai company later withdrew its offer and CPPIB subsequently made a bid for 40 per cent of AIA at $3.6555 a share.
The offer closed successfully on March 13, 10 days after Finance Minister Michael Cullen announced that the Overseas Investment Act 2005 had been amended to ensure that “New Zealand control factors will be taken into account as part of the national interest tests” when ministers considered the CPPIB bid.
The announcement was made far too late for market participants as 554 million shares, or 45.3 per cent of the company, were traded through the market between July 23 and March 3, mostly in excess of $2.50 a share. The majority of these – a total of 316 million shares – were transacted at prices in excess of $3.00. Purchasers of these shares will experience substantial short-term losses if the ministers reject the CPPIB proposal.
The ministers are empowered to make a decision under the Overseas Investment Act 2005 which came into force on August 25, 2005.
The act was designed to provide better protection for sites of special historic, cultural or environmental significance, while also encouraging foreign investment where it can make a positive contribution to the New Zealand economy.
It introduced a tougher screening and compliance regime for overseas investors wanting to buy land that has special heritage or environmental value.
According to information supplied by the Overseas Investment Office (OIO), which administers the act, only seven applications have been rejected since it came into force.
The total value of these rejections was just $4.3 million, with six turned down by the OIO and the other by ministers. The OIO points out that a number of applicants withdrew when the parties involved realised they would not meet the act’s requirements.
The Government’s asset sale strategy has been totally inconsistent and confusing and Auckland Airport is another addition to this sorry tale.
Telecom and Air New Zealand, which were both sold by a Labour government, had Kiwi shares because they were considered to be strategic companies, yet a major stake in the former was sold to two US telcos. The latter was sold to Brierley Investments and a number of foreign airlines including Qantas, Air New Zealand’s main competitor.
Auckland Airport was not considered to be a strategic asset when it was sold in 1998 yet it suddenly becomes one in an election year and just 10 days before the end of a long takeover offer.
It is extremely cynical for the Crown to sell its AIA shareholding – with the stated objective to maximise its returns – without giving any indication that it was a strategic asset, but when public shareholders try to maximise their returns regulations are introduced to deem it a strategic company.
The 22-word adjustment to overseas investment regulations, which is under the heading “Other factors for assessing benefit of overseas investment in sensitive land”, is as follows: “Whether the overseas investment will, or is likely to, assist New Zealand to maintain control of strategically important infrastructure on sensitive land.”
The two ministers face a dilemma because the best decision from a political point of view may be to reject the proposal, but it is difficult to argue that New Zealand control of the airport will be lost if the deal is approved.
CPPIB will find it difficult to exert control because it has agreed to reduce its voting from 40 per cent to 24.9 per cent and it proposes to have only three of the eight directors.
There are two other important issues in relation to the country’s strategic assets. These are:
* Why should we automatically approve the acquisition of strategic assets by New Zealand bidders when they may not have the expertise, financial resources or long-term vision to prudently manage these companies? Fay, Richwhite, Brierley Investments and Equiticorp were given effective control of a number of major former state-owned enterprises even though they had almost none of the characteristics listed in the previous sentence. By contrast, CPPIB has substantial financial resources and a long-term investment horizon.
* Why is the Government signing Free Trade Agreements, including one with China, when they contain agreements to encourage investments that may be in conflict with the political view of the AIA sale? New Zealand wants more favourable treatment for its dairy products, meat, wool and kiwifruit from China but what will happen if the Chinese want to buy New Zealand land in return? Will the OIO and ministers give a more favourable response to the Chinese than the Canadians because of the Free Trade Agreement?
Most New Zealanders have no problem with some restrictions on the overseas ownership of strategic assets but the current regime is hopelessly inconsistent and politically driven.
Investors, particularly AIA shareholders, will be hoping that Parker and Cosgrove introduce some rational thinking to the process.