The O'Brien column: Pity the poor optionholders at Tranz Rail

By Peter V O'Brien

Friday 20th September 2002

A special class of people was overlooked in the many comments made about Tranz Rail's financial, operational and share-price problems.

Pity the holders of options who had exercise prices ranging from nearly seven times the current share price down to 1.7 times.

Most relatively small parcels of options in listed companies are issued to staff of various ranks. They are un-traded, as opposed to listed options in the hands of a wide range of shareholders and the very technical options handled on the Futures and Options Exchange.

Staff options are usually considered an incentive and potential perk for people to extend themselves in the interest of the company and themselves.

Individuals buy shares (exercise the option) at a price (the exercise price) over a period of years up to an expiry date.

Some optionholders did well out of such schemes and were "in the money" if the exercise price was well below the head share price at the date of exercising the option. The two prices would have been close when the option was granted.

For example, Waste Management advised the Stock Exchange on September 6 it had allotted 1508 shares at an average issue price of $2.61 cash on August 31 upon exercise of options under an approved option plan.

It was interesting to note August 31 was a Saturday, so some executives/directors extended themselves in the waste company's interests.

Waste Management's shares closed at $3.23 on Friday, August 30 and were $3.30 on Monday.

The optionholder got a nice deal, irrespective of the waiting time.

Holders of Tranz Rail options were in a radically different position this week, with exercise prices above the share price.

They were "out of money" and unlikely to get in it for some time, unless an equally radical change in the company's prospects was reflected in the share price.

Tranz Rail chief executive Michael Beard slammed every possible foe last week when presenting the result for the year ended June 30.

Things were on track to get better in the current term. His view needed to be right in the interests of shareholders, optionholders and, conceivably, himself and other senior executives.

The last were probably among the out-of-the-money optionholders, apart from worrying about their employment futures if there was no operational improvement.

Exercise prices for Tranz Rail's options reflected the declining share price since the mid- to late-1990s, after allowance for more shares on issue.

There were five bundles of options, each of 80,000, with a May 7, 2006 expiry date, exercise prices being respectively $6.19, $7.12, $8.17, $9.41 and $10.83 (oh dear).

An expiry date of February 20, 2007 related to 300,000 at a $8.18 exercise price. April 15, 2008 and October 21 that year accounted for 100,000 options each, with exercise prices respectively of $6.27 and $3.21.

Someone exercised 94,000 options in the six months ended June 30 at $3.38 (80,000) and $3.54 (14,000).

That was another good deal, because the actual share price in the period gave the holder a gain above the exercise price.

December 23, 2009 was the expiry date for 881,851 options at $3.72.

The final two entries on the preliminary report filed with the Stock Exchange were interesting, each for a particular reason.

There were 790,000 options with an expiry date of May 8, 2010 and an exercise of $2.67. They were out of the money but only since August.

Tranz Rail's lowest share price since 2000, before the fall below $3 in August, was $2.65, recorded in the former year.

An exercise price of $2.67 for 2010 could have been reasonable then.

Unreasonable optimism seemed to accompany the comparatively recent issue of 750,000 options with a June 28, 2012 expiry date (a standard 10-year period) and an exercise price of $7.50.

Either someone was a financial twit or there were expectations of a massive share price increase over the period, which, if a valid interpretation of the reasons for the exercise price, were unrevealed to outsiders.

An alternative view, that acceptance of a $7.50 exercise price was an attempt to raise morale internally and in the wider community with no intention of taking up the share, could be an unwarranted cynicism about corporate motivations.

Make sure you read The National Business Review each week up to late June 2012.

Comments from our readers

No comments yet