Airlines in maze to daze

By Peter V O'Brien

Friday 6th December 2002

The proposed deal between Air New Zealand and Qantas may get through the political and regulatory mazes to the satisfaction of all appropriate organisations and the possible dissatisfaction of minority shareholders in the local airline.

The mazes are formidable. They were detailed in a statement last week from Air New Zealand general counsel and secretary John Blair.

The issue of shares to Qantas, the buzz-worded "strategic alliance," was conditional on:

* Kiwi shareholder (effectively the government through its transport minister) approval;

* "All necessary regulatory approvals being obtained (including those required from the New Zealand Commerce Commission, the Australian Competition & Consumer Commission and, if required, under the Australian Foreign Acquisitions Act and New Zealand Overseas Investment Regulations; and

* "All necessary Air New Zealand shareholder approvals being obtained."

An issue of convertible notes to Qantas was also conditional on Air New Zealand's receipt of "material NZSE and ASX rulings and waivers that may be necessary before December 20, 2002, in relation to certain technical aspects of the issue of shares to Qantas and other matters which will eventually be required to be obtained for those issues ... "

The New Zealand and Australian exchanges understand how hot political issues impinge on their decisions. They know other bodies have a bigger say in the deal. It would be surprising if they did much more than take a purring pussycat approach to requests for approvals and waivers, particularly as the requirements were defined as "technical matters." They can leave any upset cat clawing to the regulators.

The reference to receiving necessary Air New Zealand shareholder approvals was pedantry. Approval of the New Zealand shareholder would obviously mean approval of the "real" majority shareholder. It is the government, or the Crown, to be equally pedantic.

Other shareholders have no effective say at any level of necessary majority decision, because the government's holding ends the matter.

The other minority shareholders should also have no concern about vaunted benefits to the New Zealand economy.

Their appropriate attitude was summarised in a West Side Story song in which a character is described as being a kid with a social problem, misunderstood and needing help and sympathy. The chorus response is: "So take him to a social worker." A similar point applies to the airline.

Qantas would put $550 million into Air New Zealand on approval of the deal, diluting the government's holding to 64% and resulting in minority shareholders having even less say in the company's affairs. They will be asked to participate in a $200 million rights issue next year on terms yet to be decided.

The company's annual meeting was given a profit forecast of $200 million for the year ended June 30, 2003. A much larger future profit would be needed to justify holding the shares.

It is a dubious investment philosophy to be involved in any company where the Crown is the majority shareholder. That was seen in a passage from chairman John Palmer's address to Air New Zealand's annual meeting, read by deputy chairman Roger France:

"Processes that do not conflict with other shareholders' interests have been put in place to allow the Treasury, as the Crown's agent, access to sufficient and timely information for Crown accounting and oversight purposes. These processes also ensure the information that flows to the Crown as shareholder is effectively kept separate from the information the Crown receives in its various regulatory roles.

"The Crown has been exemplary in its dealings with the company in regard to the Crown's rights as a majority shareholder and its respect for the board's obligation to undertake its governance role in the interests of all shareholders."

That was good and even better when coupled with Treasury warnings to ministers about information being used for insider trading.

Hardened cynics would dismiss that as puffery. This column has often used a theoretical example about a couple of people who appear on a company's share register after receiving information from an insider well away from prying regulators and the media. They and the insider agree to share profit arising from the insider's information.

The buying and selling is relatively modest, unlikely to raise suspicion. There is no known link between the shareholders and the insider, even after exhaustive investigation.

New Zealand is said to have minimal to nil corruption but this fails to explain why people are sacked or prosecuted for selling confidential information.

Anyone with even a limited knowledge of the legal system knows that those prosecuted for anything are a small proportion of offenders in a given area. It would probably be the same with insider trading.

Investors need to consider Air New Zealand's deal on its benefits to them and ignore theoretical gains to the economy and unproven gains available from a rights issue.

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