St John the Diviner calls airport sale decision

Friday 17th May 2002

Auckland International Airport chief executive John Goulter is a man for whom our new Aussie-style continuous disclosure regime will hold no terrors.

While most company executives clutch information to their chests with an almost obscene ardour, Goulter is known to the markets as a sharing sort of a guy. People tend to listen closely when he thinks aloud.

At an analysts' briefing last November, for example, he was fielding questions about the intentions of Singapore's Changi Airport which, all and sundry assumed, was mustard-keen on adding Auckland City Council's 25.7% airport stake to its own.

Goulter remarked he'd be surprised if Changi were still on the share register in a few weeks.

And so it was. Changi sold its existing stake for $107 million a couple of weeks later.

So eyebrows rose around the country's dealing rooms as an interview with Goulter ran in Wednesday's Dominion.

The CEO was quoted saying he "is not certain Auckland City Council will sell its 25.7% stake any time soon." After all, he said, the council had been entitled to sell since 1992.

That may be so but John Banks became the city's mayor only last year and it's Banks who's driving the share sale process. He needs the cash to honour his election promise of dealing to Auckland's roading problems.

Nor has the council previously appointed an investment bank to conduct a share sale scoping study, although the appointment doesn't necessarily mean the shares will be sold.

Even those with an unshakeable faith in Goulter's soothsaying capabilities might have been puzzled by his prediction.

After all, Banks' and his councillors' enthusiasm for selling will have been bolstered strongly by the rocket-like performance this year of AIAL's share price.

The stock began the year at about $3.85, valuing the council's 108 million shares at $416 million. They are now at about $4.78, so the stake has gained $100 million in value.

That's partly down to the airport's strong financial performance despite September 11, and partly because investors are gambling on a new trade owner of the council's shares wanting control and having to make a high-priced bid to get it.

Few seem to have had any doubts the shares would go to a trade buyer.

For one thing, if the council was to sell it would want the best possible price and the parcel would have the most value to a trade buyer who could use it as a springboard to control.

Hopes had also been raised by the presence in these parts of the world's airport investors gathered for the sale of Sydney airport.

Now Goulter's comments have raised the possibility, no trade buyer has materialised.

The scoping report by Credit Suisse First Boston (now First New Zealand Capital) has been on councillors' desks for three weeks and they met yesterday to consider it.

Shoeshine, constrained by the straitjacket of newspaper deadlines, is going to have to take a bit of a flying punt here. Their decision might already be known by the time The National Business Review hits readers' desks.

But his plane-spotting mates reckon a few of the Sydney investors kicked AIAL's tyres while they were down here but were scared off by the airport's sky-high market price.

A second disincentive, ironically enough, is the sterling job Goulter and his team have done licking the airport into shape.

At Sydney, the pundits say, there's no end of scope for wringing more cashflow out of the airport's assets.

At Auckland, by contrast, just about the only thing Goulter has left to do is start charging for the trolleys. Even the airport's surrounding real estate is a finite development resource fast approaching its boundaries.

If no trade buyer could be found plan B was to flog the shares off to local and international institutions.

The problem there is that these fellows have an excellent grip on the airport's long-term cash generating capabilities and are unlikely to be willing to pay anything like $4.78.

In fact, Shoeshine's buddies tell him, an institutional placement isn't likely to go out the door at much more than $4.10.

Nor is a secondary public offering a tempting prospect for the council. Apart from the high expense of flogging the stake off in tiny parcels, brokers aren't going to be keen to encourage their clients to pay more than the institutions think the shares are worth.

Assuming the shares come off the block, this leaves mayor Banks with the problem of funding his roading promises. Fortunately there is a second hefty listed asset in the region, Infrastructure Auckland's 80% stake in Ports of Auckland.

Flogging IA's port stake would of course be fraught with political difficulty but the underlying argument is pretty much the same. Auckland City exists to provide services to its inhabitants and ratepayers and shouldn't put ratepayers' money at risk by investing it in commercial enterprises.

And IA exists to fund the city's infrastructure needs, not to own that infrastructure.

Still, Shoeshine suspects Banks will have some difficulty persuading IA's directors, or the electoral college of eight local authorities that appoints them, to sell the port stake in one lump.

But Banks may be able to mount a successful argument that IA should reduce its port exposure by selling, say, 29% to bring it down to 51% control, or selling half its stake or 40%.

At market prices those options would raise $260 million and $360 million respectively, enough for Banks to get cracking with steamrollers.

Not everyone will share Shoeshine's belief in Goulter's predictive prowess. But with AIAL shares fetching some 30 times historic earnings only the very brave will still be betting on a trade sale and takeover offer.

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