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Tangled tracks

By Shoeshine

Friday 13th June 2003

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The Takeovers Code is a wonderful thing. It allows shareholders to know exactly where they stand, with no fussing about or confusion.

So if you're a Tranz Rail holder you'll be in no doubt about the status of Toll Holdings' takeover offer and what effect the government's bombshell of last Friday might have had.

You'll know of course that Toll hasn't actually made an offer. It lodged ­ on June 4 according to Tranz Rail but on June 3 according to the Takeovers Panel ­ a formal notice of intention to make an offer.

Toll's offer, which isn't an offer, yet, is to buy your Tranz Rail shares for 75c each. But you can't take Toll's money now because it hasn't yet made an offer, which it must do, if it wants to, no sooner than 14 days after the notice of intention to make an offer, but no more than 30 days after the notice of intention to make an offer.

So this offer that Toll may or may not make must come, if it makes it, between June 17 and July 3, according to the panel, or between June 18 and July 4, according to Tranz Rail.

If Toll makes an offer it must be in pretty much the same form as it notified in its notice ­ sort of. That's unless they get the consent of the Tranz Rail board to amend the terms, which seems unlikely because the board's already got a heads of agreement with the government for another deal, which isn't an offer and so doesn't fall under the Takeovers Code although it does fall under the Stock Exchange listing rules so there'll have to be a shareholders' meeting on July 11 to approve the terms of the government's non-offer.

But let's not cloud the issue; if Toll makes an offer within the prescribed time range but it isn't the same offer as it notified in its notice of intention to make an offer and it has to ask the Tranz Rail board for permission to make a different offer and the Tranz Rail board says no, in effect it can, but doesn't have to, start all over again, although a panel lawyer says it's not as simple as that.

The new offer, having been duly notified and made within a maximum of 30 days ­ although that can be extended for another 60 days if it goes unconditional ­ can't be withdrawn without the panel's consent. If it isn't made within 30 days it simply expires, at which point Toll, if it wants to, can start again with a notice of intention to make an offer.

All this is, of course, scarcely worth mentioning because Toll, which no doubt has the undivided attention of a battalion of big ticket lawyers, and the lowliest shareholder from Brown's Bay who, if a Tranz Rail investor, probably can't afford to be caught looking at a lawyer's shoes, will already be crystal clear on this stuff.

That's what the code's there for. As the panel might say, it's our job to be clear.

Shareholders are no doubt on top of all the other stuff as well but there are a few points that could probably stand a little clarification.

First, there has been some regrettable speculation in the gutter press about the status of Tranz Rail's $1.2 million-a-year chief executive and managing director, Michael Beard.

Such has been the nature of these insinuations that chairman Wayne Walden has felt compelled to state that Beard has the board's full support ­ and it's easy to see why.

When Beard took over in May 2000 the company's share price stood at $2.70, giving it a capitalisation of $327 million. That year it reported operating cash flow of $73 million and paid out 17c a share in dividends.

Last year its unfortunate $123 million loss and negative cash flow of $3.6 million meant it wasn't able to pay a dividend. Nor is the government likely to be keen to see one paid this year seeing as how it's having to pump in $44 million to keep the receivers at bay.

The rail operator's shares have, of course, reflected its fortunes. Its market capitalisation hit $36 million a few weeks ago but has recovered to about $110 million on the prospect Toll or the taxpayer will pour bucketloads of cash into the crumbling foundations.

But dividends and short-term share price values aren't everything and the board has every reason to stand squarely behind Beard's famous "virtual railway" strategy even though it's going into reverse with the Aratere buyback. Shoeshine hopes to hear no more of this lowlife chit-chat.

Second, certain negative, ill-informed and ideologically strait-jacketed commentators on either side of the Tasman have had the temerity to question why the government sees fit to spend huge dollops of taxpayers' money bailing out a private commercial enterprise when other commercial operators such as Toll are interested in doing the same job.

The Australian Financial Review's John Durie reckons Finance Minister Michael Cullen is "creating a pigs' trough" from which every ailing company will seek to feed.

Now let's be very clear about this. It's not all about greedy capitalists getting the best returns on their money. The national interest is at stake.

Put it this way. Do you want to be sandwiched between two logging trucks all the way back from the skifields? Or do you want to cruise down truck-free highways, watching the logs roll by across the landscape loaded on to Tranz Rail's trains?

Cullen wants the logs on the trains and the voters on the roads and he simply can't rely on Toll, RailAmerica, or their ilk making this happen. Such people are bound to have sly agendas that have nothing to do with maximising the revenues attracted by their fixed-cost network investments.

Toll and Cullen have taken to sniping at each other. Cullen said Toll wasn't interested in a joint approach. Toll said: "Yes, we are, but Cullen won't talk to us." Cullen said: "Yes, I will but first I get the tracks."

Toll's best bet now is to make an actual offer at a price high enough to persuade shareholders to turn the government down flat. It'll have to consult those lawyers to see how it can do that without tripping over the Takeovers Code.

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