<I>Curiouser and curiouser</I>

01:43, Jan 31 2009

"You couldn't have it if you did want it," the Queen said. "The rule is jam tomorrow and jam yesterday, but never jam today."

"It must come sometimes to jam today," Alice objected.

"No it can't," said the Queen. "It's jam every other day: today isn't any other day, you know."

Replace the Queen with Helen Clark and Alice with the hapless Auckland International Airport shareholders and this quotation from Lewis Carroll's Through the Looking Glass becomes quite apt for the situation in which the company and its shareholders now find themselves.

It was no surprise that the decision by the Government went against the Canadian Pension Plan Investment Board. Having changed the rules midway through the takeover bid, and at a time when the Canadians were in effect locked into the bid, there was no doubt about where this was going to end.

The issue for Auckland International Airport and its shareholders is what happens next.


The problem for shareholders is that it is as plain as day that its capital structure is sub-optimal and that the environment the company is now operating in makes it highly unlikely that the capital structure can be significantly improved.

Any takeover/ control premium that was built into the share price has now gone, as has any likelihood that a premium will come back.

Given that the airport is now a "strategic" asset and is in effect off-limits for a cornerstone foreign investor, could a New Zealand company become a cornerstone shareholder?

The only name that springs to mind is Infratil, but it's hard to see what could be achieved from this. The only viable way would be to "merge" Infratil and Auckland International Airport, which in reality would be a takeover of Infratil by Auckland International Airport.

But to what end? Auckland International Airport would inherit a bunch of investments in other sectors and parts of the world not the least bit aligned to its core business. The market would rightly ask what the airport company thought it was up to.

The whole issue of a cornerstone shareholder for Auckland International Airport was driven by the opportunity to increase returns to all shareholders via a capital restructuring, which at the time required that the cornerstone shareholder (and funder of the capital restructuring) be a foreign entity. When the Government changed the rules on stapled securities – combining a share with an interest-earning debt instrument – the game was up as far the tax benefits of doing a capital restructuring.

While this change in tax rules took away the tax benefits of the cornerstone shareholder being foreign, there would still be some benefit to shareholders from doing the restructuring.

Now, driven by the fear of losing the election this year, the Government has effectively stopped the company from doing any substantial restructuring of its balance sheet.

While none of this has any impact on the operations or underlying profitability, it does represent a major opportunity lost for the company and its shareholders. The Government has, in effect, made fools not only of the (just as hapless) Canadians but also of the airport company and its board.

And this is where the issue of foreign investment sentiment toward New Zealand comes into play. It is hard to define what impact the Government's decision will have on sentiment toward New Zealand, but there will be some.

Think of it this way: investors, of any size and type, demand certainty – mostly the certainty that they are going to get their money back. New Zealand has an AA credit rating, so there is a high degree of certainty that money lent into New Zealand is going to come back. Debt investment will continue as it has done for some time. But equity investment is a completely different story.

News about what the Government has done will end up in front of just about every international equities manager there is. It is likely that they will review any investments they have in this country and make a call either to stay in or get out. What will upset them is not the fact that some assets have suddenly been singled out as being "strategic" (whatever that really means) – it's the way it was done.

Governments will always retain the right to change the rules, but how the rules are changed is critical. Changing the overseas investment rules so late in the piece, without warning and without any regard for any of the parties involved in this process, is what will stick in their minds. Some investment managers might have a chuckle at the Canadians, but they will also realise that it could have been them.

The fact is that equity investment into New Zealand has become significantly more risky. It might be argued that all an international investor has to do is stay away from these strategic assets. But who defines what is strategic under the rules? The Government, that's who. Who is to say that this won't happen again and that another group of companies or assets suddenly become strategic and effectively off- limits to foreign investment? The risk may be small – even very, very small – but it is still there. And that is what international equity managers will be thinking about.

They will wonder, given this new information, whether it is worth their while to hold investments in this country. New Zealand is a very small dot in terms of the global sharemarket. Do they really need to be bothered taking the risk now that the risk of investing here has just gone up? Maybe they don't, after all.

Of course, I'm not suggesting that foreign investors are going to start "ripping" money out of this country, but there is a risk that they will start to drift away. Over time this may drive down the value of the sharemarket overall, though being able to measure this effect will be hard.

So where we do end up? An embarrassed investor, an embarrassed company, frustrated shareholders and negative sentiment toward foreign investment in New Zealand, all for a piece of political theatre and short-term expediency by an unpopular government.

As Samuel Johnson eloquently put it, "Patriotism is the last refuge of a scoundrel."

The Dominion Post