Dubai Aerospace Enterprise Move on Auckland Airport: Will It Fly?

There has been much written about the recently announced "merger" of Dubai Aerospace Enterprise (DAE) with Auckland international Airport Ltd [AIA.NZX]

Let me give you my take.

DAE have offered the equivalent of $NZ 3.80 per share in quite a complex merger proposition that values AIA somewhere north of $NZ 5 billion in its entirety. This is substantially more than what the company was valued at before rumours of potential buyers started coming out of the woodwork a few months back. It was consistently trading at around the 2.20-2.40 range.

The hurdles that this merger proposition have to overcome are those that a midget would have trouble getting over even if he was thrown by a tall man.

Two city councils, Auckland and Manukau City, between them own almost 25% of the airport. Manukau Mayor Barry Curtis said they "wont sell" and the Auckland City Mayor, Dick Hubbard, has put proposals to be aired and voted on, one of the proposals includes ACC buying more AIA shares. It looks unlikely that these two shareholders will come to the party and sell, even at an increased offer.

The merger is also facing the wrath of other local and national politicians and the consensus of those in power and public opinion seems to be overwhelmingly in favour of don't sell. Public pressure against a sale is bound to resonate with a Labour Government wanting a 3rd term in 2008, its constituency would be overwhelmingly against such a sale.

The unpopularity of the AIA sale in the public's eyes focuses on the fact that they don't want to see a valuable "strategic" asset flogged off to any overseas company. Ironically though AIA is already owned 33% by foreign shareholders.

There are some, including yours truly, who have mentioned the obvious threat to national security that a bid from a Muslim backed company brings. We are reminded of last year when DAE was forced to relinquish ports bought in the US for similar security reasons. This itself alone is a good reason to block the sale of AIA to DAE.

I have no problem with AIA being sold to anyone else, foreign or local and in fact there is rumoured to be at least another seven possible buyers for AIA assets with a handful currently doing due diligence, among them are Melbourne airport owner, Australia Pacific Airport, Macquarie Airports and Canada Pension Plan. The last is said to be close to launching a bid.

The only problem that I see is price. While the offer by DAE is considerably more than historical AIA value placed on the company by the market AIA is a very attractive asset.

It is in a monopoly position, has one of the highest profit margins for any airport in the world and is highly undeveloped compared to foreign airports.

It is this undeveloped nature of the business that must seem the most attractive proposition to potential bidders. It is for me as a shareholder and I intend to hold long-term for that reason alone.

There are vast tracts of undeveloped land with uses for ancillary services for the airline business, retailing and hotel potential and a myriad of other possibilities. In fact AIA was discussing the possibility 2 or 3 months back of splitting the land/retail based assets of the business from airport business and trading the two entities separately on the NZX. That is where the value lies.

In my opinion the sale of AIA looks unlikely to anyone but when you have interventionist local and national politicians involved in public companies you never know what is going to happen. A couple of years ago Ports of Auckland, a publicly listed company, was bought by the Auckland Regional Council and delisted and before that Air New Zealand was grabbed by the State "in the interests of the country"

AIA CEO says the DAE offer "should be accepted by shareholders in the absence of another offer" but he himself has undervalued the very company he presides over and its shareholders.

Long-term the company is worth much more.

Disclosure: I own AIA shares

AIA @ Share Investor

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c Share Investor 2007

Panic! Wot me?

There has been a bit of a drop in world markets over the last few days, you might have noticed financial news creeping into the main news headlines again and journos urging investors to unlock office windows.

Of course we have seen this all before, headless chickens running for the hills, as their pockets spill over with moola, not as much as they could have had if they had kept their shares and sold them in a rising market but happy in the fact that they wont lose anymore capital. Clearly these individuals shouldnt have invested in the stock market if they pull out at the slightest fall in share prices.

The New Zealand Market was the first to open on Monday the 30 July after a weekend of thought by some investors over the world markets dropping last week.

It is likely that the US market will be volatile on Monday's Wall Street opening and the cycle will begin again here in NZ Tuesday. Similarly volatile global markets will probably be the order of the day for a time.

There is a silver lining though folks!!

If you are a long-term investor, like me, then you may want to do the opposite to all the chicken littles out there and buy instead of sell.

That stock that you have had your eyes on maybe alot cheaper now and aint it better to get a good deal in a sale rather than pay more as stock prices go up?


c Share Investor 2007

Love Xero?

Scott Manages a website development business in London and answered a few questions for me about the recently listed software company Xero [XRO.NZ]and what its prospects might be for the future. He is not affiliated in any way with the Xero company.




About the software


Powerful connections. With Xero, you can access your accounts and run your business from anywhere in the world, 24/7. And your trusted adviser's can login and view your accounts too, providing valuable real-time advice when you need it most. No more confusion, no more delays. Say goodbye to barriers. Xero's intuitive work flow makes painful data entry a thing of the past. Seamless bank integration allows your statements to be loaded daily without even clicking your mouse. And Xero's powerful Dashboard gives you a real-time snapshot of your business at a glance. Peace of mind. Xero takes care of your data security and privacy, so you don't have to. Your data is stored on our secure servers and backed up every day, so even if your computer is lost or stolen your data is safe. You control who has access. The only people who can see your personal data are those you choose.


The Questions

To answer your questions, most of which require some degree of speculation...

Share Investor: How much market share, given time, do you think Xero can take away from traditional off-line providers?

Scott: Plenty, with time. Initially people like myself will become the early adopters, and if it really is as good as it potentially can be, word of mouth will spread it far. The advantage for Xero, what harm can there be paying a couple of hundred dollars to test it out for a few months, indeed they could easily offer a free month or two, once you are hooked (or you get to the point that it's easier to persevere than change accountancy systems) then you have a customer for a very long time.

I can see growth potential with payroll integration also, email payslips, the whole thing. Too many companies use a different piece of software for every different tasks. Then licensing fees, upgrade costs, etc.

One of the biggest costs with traditional accountancy systems is multiple users on multiple PC's. This cost is gone with Xero.

S.I. Is the Xero product so superior that it will take users away from other online providers such as Quicken and MYOB?

Scott: I think yes, eventually. So it is a long-haul investment. MYOB and Quicken will respond, Quicken already has an online model in the US. But they rely heavily on what I outlined above, once a user has coughed up the $ and implemented their business on a system, they aren't going to change in a hurry. Give them a compelling and easy change though, and who knows?

Xero's advantage here is they can make changes, fixes and upgrades quickly and efficiently, Change a few lines of code and instantly fix a bug or small problem. Spend a day programming a new feature, test it, and it's online two days later.

S.I. The costs to the end-user, are they lower than online software?

Scott: I think if you looked at the OVERALL cost it would be competitive, compared to the features and abilities available. Sure, you can spend $400-600 on MYOB or Quicken and use it for 5 years - or spend $600 a year on Xero. But what are you missing out on that your competitors will have over you during that time? Quicken and MYOB still have issues emailing a frieken invoice! Xero will probably be able to integrate into your company website... it wouldn't surprise me if they implement a Credit Card payment module for you to use...

S.I. Margins for the company, how good could they be once initial establishment costs are factored in and then overcome over time?

Scott: Fantastic. SaaS is a wonderful business model. If things are done properly you could have a handful of people run the entire company (as it is). They will have to hit the right mix of features, price etc and I think that they will. It will be very interesting to see what offers they come up with, really I should email Rod Drury to see if some of the things I have mentioned here are on the cards.

S.I. Is the only point of difference between competitors off and online products the fact that Xero is online?

Yes, and No. Being online does lean toward a whole other set of advantages, a few of which I outlined above. There are certainly advantages to having offline software, if you are stuck somewhere with a laptop and no internet connection, but is that the way of the future? No, I didn't think so either.

S.I. Will it be horrendously expensive and or technically challenging for prospective clients to switch from their current provider to Xero?

Scott: I hope not. There are several options, either you keep your existing accountancy software around, but stop using it on a certain day and transfer balances, stock levels etc to the new system. Or Xero can come up with a migration tool. Or simply target NEW businesses first or those without an existing system.

They would be smart to sell this to the accountants, who will then recommend it to their clients as a system they can easily access as well. The possibilities are limitless, but no changeover will ever be VERY easy... or, it could be, who knows?

S.I. What is the main reason why you want to use this software and why not shift your current business accounts to Xero as well?

Scott: I sold both of my businesses before leaving for London, and my Trust accounts are so pathetically easy I do them in Excel. However, When I return to NZ my next business will be Xero based. I will use it to eliminate the frustrations I experienced with other accountancy software I used, mainly user limitations, bank reconciliations, expense management, jeepers almost everything!

The value I see in Xero is that if a feature ALMOST works the way you'd like, theoretically they can have change online within hours after a response to user feedback. This will happen thick and fast on startup, as they vie to impress...

S.I. Are any competitive differences easily overcome by Xeros rivals?

Scott: If Xero's rivals are well aware of their weaknesses, why haven't they done anything about them by now? I think they have underestimated the online market, to be honest, as have many people in the past - I can see Xero's advantages, and have watched them closely since listing. Maybe there will be rumblings, who knows? I am willing to bet the people behind Xero intend to stay ahead of the pack no matter what, and they are off to a good start.

S.I. How will the likes of giants such as Google online apps affect Xeros entry into the marketplace?

Scott: Hard to say, multinationals often forget New Zealands special needs in these areas, so Xero may rocket here but find it hard to break the US and UK. A tough call.

S.I. What are the costs of continuous development of this software to stay ahead of the pack?

Good question, although I don't have the answer I would say they are attractive compared to version updating, releases and distribution from the big two...

To put it in perspective, I work for a company in London that uses a SaaS model, they don't really even realise it. The IT Dept consists of 5 staff, which is more than sufficient to manage the website and support new development. The online model is worth hundreds of thousands of pounds to their business.

They developed it themselves to replace the offline model, shooting themselves in the foot? No. Because they have happier and more dedicated customers, spending more money with them!

S.I. Given mostly positive answers above how long do you think Xero could take to become a market player of some substantial nature or even a dominant player in this sector?

Scott: I will get onto the Xero bandwagon soon, I think their listing price could still drop a little more while they are quiet and people get itchy feet, or don't really understand what they have bought into... Xero will show it's results when it is ready, I get the feeling it will have VERY rapid growth, next year(2008) should be an interesting year.

End.


Xero @ Share Investor

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Discuss XRO @ Share Investor Forum

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c Share Investor 2007

Competing With Style

Ain't Competition Nasty!!

I just want to relay my thank you to those of you who have bothered to contact me over the demise of the old Share Investor Forum. It has taken a lot of work to get it going and it was getting a couple of thousand of visitors a day. Not big, but it was growing.

It seems I have now been relegated to the realms of blogging. Here I shall stay and I hope some of you will join me.

The main thrust of this post has been spurred on by the nastiness that has come from individuals and those connected with http://www.sharetrader.co.nz/ . They are responsible for informing my host, http://www.jconserv.net/, that I was "violating copyright" on my site and thus here I am now.

I'm not sure what the "violation" was for but suffice it to say Share Trader has a wealth of material on it that infringes copyright. I am not about to inform the owners of copyrighted material of such.

The nastiness started soon after I opened the site last September, with subterfuge related to the owners of Share Trader, re-directing my URL to a porn site and an attack on its content in early 2007.

For the life of me I don't understand why Share Trader may be afraid of a little competition. They are in a monopoly position, so perhaps they want to maintain it anyway they see fit?

Competition is really what today's piece is about and I can relate my recent experience to the business world in general and specifically to New Zealand business and its listed companies.

Perhaps the most glaring example of recent occurrence when it comes to tough competition is the stoush between New Zealands two major supermarket players, Foodstuffs and Progressive, over the battle for control of The Warehouse [WHS.NZ] Foodstuffs and Progressive currently dominate the supermarket sector with duopoly pricing but want to take out a fledgling player in the supermarket industry simply because they fear what a bigger third player might do to corporate profits.

These two players are not interested in competing at the shop floor with a new entrant, they simply want to eliminate this competition before it starts.I am not against competition but surely if Progressive and Foodstuffs want to expand their empires why don't they duke it out with the minnow fair and square, compete on price and service and open some additional outlets of their own?

It is interesting to note that Progressive have stopped one of Foodstuffs outlets from opening on Auckland's North Shore for more than 10 years and the market has lain idle for more than two years as empty as it was when first built. Legal action has also been taken(and failed) by Progressive to shut down an outlet mall in the same area for dubious reasons.

The fate of this stoush is now in the hands of New Zealand's Commerce Commission.

Monopolies in New Zealand are very common. This is mainly because we are a small market. The consumer clearly must be protected to some extent from these giants.

Telecom [TEL.NZ]and its dominance in the tel co sector for the last 20-30 years has had a negative effect on New Zealand, its economy and the consumers back pocket. The technology that Telecom customers must use is never up to date with overseas tel cos and most communication is still being done with the use of copper wire. True enough Telecom has been a good business for its early investors and many have made plenty of moola but as time has gone on the refusal by management to invest back in the business has cost Telecom ,its current shareholders and customers dearly. New Zealand is currently at the back end of the line when it comes to broadband and its products are expensive. Its current shareholders have lost big time.

Vodafone, similarly, seems to have adopted many of the traits that Telecom has had as a Telco monopoly and its mobile service and prices reflect the duopoly structure that co-exists with Telecoms mobile network.

It is a human trait to be confidant when one is in a good position in life and one could be forgiven if one was even a little cocky and boastful at times but some of the leaders of our monopolies take this position to levels of arrogance that seem to mock and deride their customers.

The recent case of Teresa Gattung is a well known one. She professed in 2006 in a Telecom shareholders meeting that "...the tel co business model, using "confusion" as a "marketing tool to maintain prices and margins" and that Telcom had been using this model for years wasn't really a shock to consumers but what was a slap in the face was the fact that she actually said it with impunity!!

Perhaps the funniest use of arrogance and disdain for consumers of recent times by the CEO of Auckland Airport [AIA.NZ] was his contention that narrowing the duty free retailers from two down to one at Auckland International Airport would "...give consumers more choice and the same low prices that they have always had..." now I didn't graduate from university with honours but even I can fathom that Don Huse might be pulling on something more malleable than a duty free wine cork. This individual is currently telling AIA shareholders to sell their shares to Dubai Aeronautical Enterprise for a measly $NZ3.80. Would you trust him? I don't.

Even my favourite topic of discussion of listed companies on the NZX, Restaurant Brands[RBD.NZ] have displayed some of the qualities of a monopoly over its last 10 years as a listed company without actually being one as such-to be fair though its Pizza Hut and KFC divisions were very dominant. Vicki Salmon, its most recent CEO, was blind in the face of reality when every time there was a poor profit announcement(which was most often the case) she continued to trot out the mantra "...we expect to see an improvement in the coming months..." The real arrogance of Vicki and her predecessors though was the fact that they had two dominant brands, KFC and Pizza Hut and much like Teresa Gattung RBD management neglected those brands simply because of their dominant positions and the thought by management that these brands were bullet-proof. Those two brands currently wallow in mediocrity in the face of real competition from the likes of Dominoes and Nando's Chicken.

Sky Televisions [SKT.NZ] position as the only player in the pay TV market in New Zealand makes its clients shake in their boots every month when their account arrives. Monopoly pricing rules and the arrogance of management when consumers complain is almost on a par with Telecoms head honchos. Perhaps they all went to the same charm school but I detect a pattern with management reaction to customer complaint when you are the only big kid on the block.

A dominant player that must be admired is Coca Cola. The focus on their product is fanatical and every aspect of marketing and selling is expertly crafted and nurtured from upper management all the way down to the fridge in the corner store. Coke ignored their consumers in the mid-1980s when they changed the formula of Coke without consulting consumers and had to back peddle when a backlash by consumers saw sales volumes fall in the USA. Their dominance of the caffeinated fizzy beverage market gave management the belief that they could mess with their leading product without a consequence. How wrong they were. They did learn from their mistake though and that is to be admired.

What can happen when a company or individual has a dominance in its field-and clearly they have got that way because they have been enterprising, hard working and clever-is that its position as the only or biggest player can be undermined by the tunnel vision that often comes about when one doesn't have to look over ones shoulder at the ankle biter running behind you. When suddenly that ankle biter starts nipping at your heels your reaction to the competition is a very important pivotal position for your company or product. What you do next, whether it be competing on a level playing field in your market or trying to undermine the newbie in any way you can , can have a negative perceptional outlook on your company from its consumers and ultimately a material effect as you lose the vision you once had when you initially set out to conquer your entrepreneurial goals.

There are countless monopolies that have fallen because of lack of care, they shouldn't have simply because they were in the dominant position, but the lack of care for the consumer and or the product or service they sell can even bring a dominant player to its knees. Management simply can't overlook basic business acumen simply because they "own the market."

Competition is essential to life, in business, on the sports field and life in general but ultimately if you play with a loaded deck and cards up your sleeve you , your company and your product or service just may be the loser in the end.

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