Forum Archive Index - May 2001

["Peter Maiden" <pmaiden@xtra.co.nz>]

The capital structure of some companies have come under scrutiny lately. This is one area where the longer term investor tends to overlook when evaluating an investment.

 

This is usually to their detriment as TEL shareholders found out this week. The issue of 91 million new shares has diluted the interest of exisiting shareholders and they now need to wait to see whether the benefits of a stronger TEL balance sheet will be reflected in the shareprice over time. Didn't help TEL shareholders last week though.

 

Of course the other big company needing to do something with their balance sheet is AIR. I do try to avoid talking about AIR but as they are now my employers preferred airline they now have a greater share of mind - I can't avoid their presence.  I also have an interest in how corporations structure their capital requirements. Above all the current AIR story is developing into an intriguing one, and one we will hear a lot more about of in the future.

 

And it can't keep out of the press. Good article by Fran O'Sullivan in The Herald this week which put a pretty positive light on current affairs and highlighted the importance of Ansett in securing the feeder routes in Australia to ensure the future of AIR's international activities. Then again there was a good piece from Chalkie in The Independent in which he felt no sorrow for BIL's part in the Ansett affair and thought it rather ironic that BIL would possibly have to front up with more dosh - maybe that is why BIL have cashed up their Hardies investment..

 

Back to AIR's balance sheet - badly undercapitalised. Even taking into account the much touted pile of cash they have AIR has a debt to capital ratio of 66%. For comparison the Qantas figure is 50%. To get back to a more respectable 50% AIR needs to reduce debt by $1.7B or increase it's shareholder's equity by $1.7B. These numbers are baseed on the December balance sheet.

 

Some asset sales and some more cash generated over the next few months will help the situation and no doubt they will not not want to get down to a 50% debt to capital ratio in one go.

 

However a fugure of $0.75B needed in new capital is a good figure to work with.

 

Assuming that AIR do not really want to sell Ansett the only real alternative is to either find new shareholder money or go to existing shareholders with another rights issue,

 

With 3/4 million shares currently on issue the amount needed is about $1 a share - would current shareholders (assuming SIA and BIL front up) be happy fronting up with a $1 for every share held?  That is the size of the problem - very much like FFS.

 

But if the equivalent amount of new capital was raised another way current shareholders interests would still be diluted by 50%..

 

The current AIR situation isn't pretty. It appears that shareholders will be affected in a big way one way or the other.  There is still a lot of water to flow under the bridge yet.

 

When at the airport the other day I asked the delectable looking Wendy (the AIR uniform doesn't do her justice) what she thought about AIR recapitalisating (inside info?). Her response was that as long it put more into her pay packet she thought it would a good idea.

 

Those are my views - shoot me down in flames if I've got it all wrong.

 

Peter