Thursday, February 21, 2008

Bruce Sheppard: Of councils and airports

Bruce Sheppard gives (AIA) shareholders the details and lowdown about the coming vote to sell 40% of AIA to the Canadians.

It is essential reading for shareholders


Bruce Sheppard in Stirring the Pot | 6:00 am 20 February 20o8

The Canadian pension fund has made a bid for 40 per cent of the outstanding shares in

Auckland International Airport at a price of $3.65 for each share acquired. The current price is approximately $1 less than the offer price.

The total number of shares outstanding is 1991 million, which means that the Canadians seek to buy 796.4k. The total premium amounts to $796 million and will be shared among those shareholders who fill the second form in to accept on pro rata basis.

The Auckland and Manukau city councils have each said that they intend to vote “no” on the first form, which is their prerogative. While they have not explained their rational for this, and nor are they obliged to, it is clear that the decision to vote “no” is in response to public opinion. Given it is the voting public that elect them, this is no surprise and understandable.

This vote requires 50 per cent of those who vote to choose “yes” in order to pass. Should the vote go “yes” the Canadians will succeed in achieving 40 per cent ownership and those who accept will share in the premium. If the vote is lost, then all those who accepted the offer do not sell any of their shares to the Canadians and will retain all shares they currently hold.

airport-pic1.jpgIt is clear both domestic and foreign institutional investors and hedge funds will vote “yes”. This to is unsurprising as such funds are measured on quarterly performance and thus in the main are short-term focused and opportunistic. These funds more than balance the council shareholdings. Thus small shareholders will have to vote strongly “no” for the resolution to be lost. Small shareholders are traditionally a bit of a lottery and the institutions are hoping for a small turnout on the vote.

So the first and only choice in this matter is how to vote on the poll, the second choice is not a choice at all, if you are rational.

Small shareholders should all exercise their right to vote. If they don’t want the airport sold and they do not want to sell either, then they must vote “no”. If they want to get somewhere north of 40 per cent of their shares bought at $3.65 and bag their share of the premium, they should vote “yes”.

I have now discussed this bid with both the board of AIA and the Canadians directly.

I will outline the value add as the Canadians express it:

1. The Canadians propose an amalgamation post this transaction merging the takeover vehicle with AIA. This will create subscribed capital, which can then be returned to all shareholders tax free, this redemption being funded with debt. They say, therefore, that the after tax cash flows on your remaining 60 per cent will be about equal to what you were getting on your original 100 per cent. This requires shareholder, board and Inland Revenue approval. Opinion is divided on whether the IRD will approve it.

2. The second biggie is that they will increase the board firepower and give AIA access to overseas business that can increase the route traffic. They will do this by infomercial marketing using their network of other investments.

3. They will change the airport’s focus from a focus on travellers as its customer to a focus on schmoozing airlines. Music to Air New Zealand’s ears. On this they do have a point. AIA gets much of its income from airlines and it is airlines that need to be wooed to increase AIA traffic.

4. They will focus management on improving the business of AIA.

5. Now interestingly here is the contradiction. While they have some criticism of AIA management, some justified, they respect them sufficiently that they think they can lever the management into managing other peoples airports, an interesting contradiction.

Now to local body politician stupidity. Between Auckland and Manukau their share of the control premium is approximately $200 million. They have publicly stated that they will both vote no and not accept. The net effect of this is that they are transferring this sum of money to the shareholders who accept, the majority of which will go to foreign institutions and hedge funds. How dumb is that! Because the balance of the sales will be made up from those who do want to sell, the control premium will be paid to those sellers only.

Ratepayers in Auckland and Manukau should be deeply concerned that their elected officials are going to transfer money from them to foreigners, never to be recovered.

If they do not wake up to this, remember their stupidity when you face your next rates hike and vote them out. In the meantime write to them to counter balance the “public opinion” that they think they are adhering too.

The New Zealand Shareholders’ Association is not an investment advisor but I am authorised to say categorically that regardless of how you vote on the resolution whether or not to sell 40 per cent, all shareholders should accept the bid. It is simply crazy to transfer your share of the premium to those who do accept. If you vote “no 40 per cent sale” and win on that vote, there are no sales to anyone. If you lose that vote and the Canadians are successful, your chance of extracting a subsequent control premium is so close to nil that you can discount it entirely.

In summary, the issues for shareholders to consider before they vote are these:

First , in relation to the 40 per cent sale issue:-

* If I sell and get cash, what will the remainder of my shares be worth and how many will I get sold?

* If I take cash, I then have to reinvest it, (reinvestment risk) and what are my chances of finding a recession proof investment such as AIA?

* If I only get 40 per cent of my shares sold, I am only getting a control premium of 40 cents on current prices, or the equivalent of about $3 per share. This is below the independent advisors valuation range, so am I getting full value?

* Can the Canadians add enough value to AIA to make the deal worthwhile, i.e. can they improve the price of my remaining shares?

Secondly, in relation to the offer to sell your own shares if the first vote is successful:

REGARDLESS OF HOW YOU VOTE THE FIRST ISSUE, THE RATIONAL RESPONSE IS TO ACCEPT THAT (CONDITIONAL) BID.


Disclosure: I own AIA shares


AIA takeover calendar

Early March: Auckland City Council votes on its response to CPPIB offer
March 6: Deadline for Auckland airport board to review its objection
March 13: CPPIB offer deadline for shareholders


Related Share Investor reading


Softening opposition to CPPIB bid

Directors of AIA bribe brokers not to sell
What is Auckland Airport worth to you?
Second bite at AIA by CPPIB might just fly
AIA new directors must focus on shareholders
Auckland Airport merger deal nosedives
The Canadians have landed
AIA incentive scheme must fly out the window
Government market manipulation over AIA/DAE deal
DAE move on AIA: Will it fly?


Links c Share Investor 2008