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Toll has upper hand in Tranz Rail saga

By Duncan Bridgeman

Friday 4th July 2003

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Tranz Rail institutional investors are keeping their options open less than three weeks out from a deadline to accept Australian company Toll Holdings' offer for the rail company.

The institutions can courier their acceptances on the Toll offer to the computer share registry less than an hour before the 6pm deadline on July 23.

The battle for Tranz Rail has turned into a war of attrition as Toll and the government put pressure on shareholders to accept their respective bids.

Finance Minister Michael Cullen this week launched a new offensive ­ hitting Wellington institutions with reports valuing Tranz Rail at $1.30 a share under the government's current offer.

Toll's managing director, Paul Little, followed suit, seeking confirmation his company could secure a 51% stake with its offer of 95c a share. The company offered an incentive for brokers to obtain acceptances for its bid by way of a 1% handling fee.

Sources say Toll, which holds a 19.9% stake in Tranz Rail, has the upper hand because the institutions, including Alliance Capital Management and AMP Henderson, have major concerns about the government's proposal.

The government is offering to buy the track network for $1, inject capital and pay $75.8 million for a 35% shareholding.

Tranz Rail shareholders are waiting for an independent appraisal from Grant Samuel on both bids before Toll's offer closes at 6pm on July 23.

It is understood the major shareholders are comfortable with Toll's offer as it provides a cash certainty as of today and also gives them a chance to recuperate loses suffered during the past year.

Under the government's proposal the operator will receive a taxpayer subsidy worth about $20 million a year but holders will be diluted heavily by the government's share issue.

"The only way they are going to get their money back is by partially accepting the Toll offer, so that Tranz Rail continues as a listed entity," one analyst said.

Toll is seen as a smart operator, capable of turning the debt-ridden Tranz Rail around, whereas there is still uncertainty about the government's proposal, particularly over the management structure of the rail company.

Last Friday the government valued Tranz Rail's operating capital at $421 million, or $1.30 a share, and set the weighted average cost of capital (WACC) at 9.3%.

Sharebroker First NZ Capital also valued the company at $1.30 a share, based on information from a heads of agreement with Tranz Rail, provided the Crown offer proceeds.

Alliance Capital portfolio manager Andrew Bascand questioned the amount of time it took the government to provide details of its offer and in particular the WACC analysis.

"It suggests that both parties started a long way apart and are now working toward a middle point," Mr Bascand said.

Each side claims the other has not been interested in pursuing a joint approach to recapitalising the rail operator, which is on the brink of insolvency.

Dr Cullen has said the government wants to negotiate from a position of strength as the track owner. He is supported by the Rail Freight Action Group, which says its large exporting members could double their rail freight volumes over the next five years if the government's planned restructuring of rail is implemented.

The action group, whose members include major Tranz Rail freight customers Fonterra, Carter Holt Harvey and Solid Energy, said the projected volume increases would eventuate only if the government's restructuring proposals were accepted.

There is speculation that the government might up the ante as the deadline for the Toll offer draws near, although it is unlikely to level the playing field by making a cash offer for Tranz Rail, analysts say.

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