Forum Archive Index - May 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Hoop,
 
>> 
>>
>> I would say that action of Westpac (Investment Funds)
>> was quite sensible. Tranzrail were/are facing bankruptcy 
>> within the space of a few weeks. 
>>
>>
>
>If that happened and the Govt were irresponsible to not intervene,
> the railways would have to cease operations making reliant 
> businesses unable to move their produce, that would cause
>national economic chaos wouldn't it ? 
>
>



I think you are arguing here Hoop, that Tranzrail would not have been 
allowed to cease operations as it is a kind of essential service so 
investing in Tranzrail was not quite the risk it seemed.    I think that is a 
common view, and a scenario that many 'investors' in Tranzrail who 
moved onto the share register over the last few months were banking 
on.   I also think that this comment highlights a couple of what I see as 
myths on the subject of Tranzrail which are worth discussing further.

1/ Myth 1:  Tranzrail will never be allowed to cease operations as it 
would be chaos for the exporters and road users alike, so investment 
in an icon like Tranzrail is always safe:

Exploding Myth 1:    The above myth is based on an error in fact, that 
an investment in Tranzrail and the physical rail operations are 
irrevocably coupled.    This is completely false, so it is no surprise that 
any conclusions based on these 'facts' are wrong.

Those who buy shares in Tranzrail are not buying shares in our rail 
system.  They are buying shares in a financial entity that controls the 
rail system,  which is a significantly different thing.   The financial entity 
that controls our rail system can go completely bankrupt leaving 
shareholders with nothing.   But that does not mean that all trains will 
suddenly grind to a halt.  If Tranzrail go bankrupt, then the banks will 
take over control and can continue to operate the rail network.   
Superficially trains are still running and goods are being moved but 
that doesn't stop the financial entity belonging to shareholders that 
used to control Tranzrail being permanently dead.

A local example, some ten years or so ago of this situation was the 
case of flamboyant Israeli millionaire Michael Sherry buying up shares 
in financially embattled locally listed TV3.  He did so because 'TV3 is 
an icon which would always exist in some form' and it was 'going 
cheap'.    Sherry was right in that TV3 is still here.   What Sherry didn't 
understand was that buying shares in TV3 was really buying into a 
financial entity that controls TV3- not buying the hardware and the 
people that make up TV3 itself.   That locally listed TV3 financial entity 
is dead and Sherry has lost all his money.    The fact that TV3 is still 
up and running and now owned by CanWest is of no financial benefit 
to any of the final shareholders of  the local listed entity that was TV3.



>
>
>Or perhaps a form of nationalization at the 12th hour, 
> which would perhaps have the same result for 
> shareholders? 
>
>



which leads to 

Myth 2:  Investing in a national icon like Tranzrail is always 'safe' 
because the government will not allow it to collapse.     There will 
always be a nationalization safety net under it.

Exploding Myth 2:   It is not certain that the government will bail out an 
icon like Tranzrail, by 'doing an Air New Zealand' and putting more 
financial equity into the financial holding company that operates 
Tranzrail.   

Another way would be to let Tranzrail go bankrupt and nationalize it by 
the method of the government buying shares off the receiver.    This 
way means existing shareholders get nothing.

The other uncertainty scenario, if there was a capital injection, is that 
the terms of any capital injection are completely unknown.  In the case 
of Air New Zealand,  AIR shareholders had their share of 'our' airline 
business reduced from 100% to around 20% as new shares issued to 
the government diluted their holding.    But there is no guarantee any 
similar rescue of Tranzrail would be structured the same way.   

Let's assume the net tangible asset backing of TRH is $2.00, and we 
use that as a measure of today's value of Tranzrail.  By that measure 
Tranzrail trading at 45c is a bargain.    

Now let us assume that the government issues four shares to itself at a 
price of 30c for every share of Tranzrail that already exists (the same 
deal that they gave Air New Zealand).  This means the net asset 
backing per share reduces to 64c.    You could argue that it is still 
good value to buy TRH at 45c under this scenario.

However, there is no compulsion at all for the government to issue 
shares to itself at 40c.   As a funder of last resort the government might 
decide it is only prepared to pay 5c for the new shares it issues itself.  
Because it is only prepared to pay 5c, but Tranzrail still needs the 
same amount of money, the government will need to issue eight times 
the number of shares to itself as originally envisaged.

This reduces the net tangible asset backing of all Tranzrail shares to:

[(1x $2.00) + ( 8x4x $0.05)]/ 33 = 11c

This makes TRH shares on the market at 45c look very expensive.

The point I am making here is that there is no rational method to 
decide if TRH shares at 45c are a bargain or not without knowing the 
terms of any 'rescue' package.    Fundamental analysis of the existing 
Tranzrail will not help you here.

Buying TRH shares at 45c was a straight gamble that could have gone 
either way.



>
> 
> but why did
> Amp Global Inv (NZ) invest about 3 million, (1.6%) notice submitted on
> the 8th May, and Tower Assett Management buy about 10.5 million (5%)
> notice submitted on the 9th of May.Did these finance managers know
> something that the Westpac managers didn't?  
>
>


If you are suggesting that some fund managers had 'insider 
information' and some didn't then I doubt it.    

Many fund managers operate share funds based around index 
benchmarks.  This means they generally follow index weightings 
because they don't want to drastically underperform their competitors.   
But active managers like to retain some flexibility to 'pick shares' in the 
belief they really can 'get one up on the other guy'.

I know for a fact that BT funds management, now run by Westpac were 
overweight in Tranzrail shares.   Given they were in that position they 
were under some obligation to reduce the risk of a catastrophic loss on 
TRH by selling down their holding.   By the same token it is likely that 
other managers in other organizations had long sold down Tranzrail 
shares and didn't want to risk missing out on the possibility of a 
bounce in Tranzrail shares should it happen.  That explanation is I 
think far more likely than the idea that some privileged players were 
privy to market whispers and some were not.

SNOOPY




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