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Mainfreight, Owens look good bets while Tranz Rail's on branch line

By Peter V O'Brien

Friday 20th June 2003

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Saturation coverage of government and private sector bids for Tranz Rail and the latter's continuing performance woes pushed the other two operators in the transport sector to effective press footnotes.

They performed reasonably well over the past year, despite Owens Group's 14.5% profit decline in the year ended March 31 before the company revised the result to account for an audit qualification regarding a deferred tax asset in regard to Australian subsidiaries. The revised figure was a loss of $636,000, compared with $3.25 million profit in the previous year.

Owens considered it would get utilisation of the deferred asset but the auditor applied a "virtual certainty" test to the company's ability to use it.

The company decided to write off the asset against profit. It announced the revised result of May 30, as an apparent "continuous disclosure" statement to cover itself after sale of its Hirepool subsidiary to a consortium in which it retained a 24.5% holding and learning Mainfreight had 10.1% of Owens.

Mainfreight's buy was described in the preliminary report for the year ended March 31 as "evidence of our strong commitment to New Zealand as our home base." But a 10.1% holding in a partially competitive, but also complementary, operation was hardly a "strong commitment" to New Zealand, given both companies' overseas-based operations and the size of the stake.

A merger of Mainfreight and Owens seems sensible. It would increase the "home base" in several areas and strengthen international operations in which both are minnows in a pond teeming with big fish.

The Commerce Commission would need to approve a deal but the effect on competition and monopoly tendencies seems small, given the broadly-defined transport industry's fragmentation and the skirmishes around Tranz Rail.

Mainfreight managing director Don Braid commented in the preliminary report that the recent "ownership battle for Tranz Rail is indicative of the challenges we face ... Tranz Rail is a major transport infrastructure in our backyard and in theory should represent to us an opportunity."

He unfortunately went to a branch line, because he moved immediately from Tranz Rail as an opportunity to the company's need for expansion overseas.

Owens was more direct. The preliminary report said the group was working on a number of acquisitions, including Tranz Rail's road transport and distribution business, Tranz Link.

Publicity surrounding Tranz Rail could have obscured several points, which may, or may not, be clarified at the company's July meeting to consider the government's bailout. People seem to have overlooked Tranz Rail's 27% interest in Australian Transport Network (ATN), which operates in Victoria and New South Wales and has freight services in Tasmania.

The arguments seem based on Australian bidder Toll Holdings tempting the big Tranz Rail shareholders with an increased cash offer, likely to be ignored. Tranz Rail's meeting could resolve the matter in favour of either the government or Toll. It is doubtful the latter would be too upset if it "lost."

The Australians could go after 27% of ATN while the government dealt with the tracks for virtually nothing and Owens and Mainfreight took the road transport operations. Everyone would win in that scenario.

Toll would get what it probably wanted, the Australian rail shareholding, because the government would dispose of that stake if it ordered Tranz Rail's board to retrench ambitions.

The Australian group is sitting on a good profit from its shareholding, no matter the outcome. A vote against government intervention, or partial intervention, could leave all participants with gains, including taxpayers who will eventually pay $1 to someone for the tracks.

Don't be surprised if some link between Mainfreight, Owens and other local Australian groups decides Tranz Rail's fate. Assuming the government's offer is approved, shareholders will see other transport companies get some of the action.

Mainfreight and Owens look good investment bets in the current environment.

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