By Peter V O'Brien
Friday 20th June 2003
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There is no commonality of operational activities between a rail transportation company, with interests in ferries and road transport, and a financial services group but their problems seem to arise from similar situations. Both have significant debt repayments due in the near future.
Tranz Rail was due to pay $44 million yesterday for lease repayments. The government's package covers that outgoing, the amount being repayable next year if shareholders at the July 11 meeting fail to approve the issue of shares to give the government a 35% shareholding.
Total proposed government participation, including acquisition of the tracks for a nominal $1 and spending $100 million on their upgrade over five years, was proof Tranz Rail's current problems were cashflow-based. They related to an apparent inability to cover commitments from cash, without the injection of more funds.
Tower's problem was said to be the need to get cash quickly to finance repayments of $100 million in early August. Hence the need for a share issue to Guinness Peat Group (to be voted on at the July 4 special meeting), as part of a refinancing package, and a renounceable cash issue. Tower took a net $133.35 million, after tax, of unusual items to account for the year ended March.
Most of it was amortisation of goodwill and value of in-force business, items that wrote off $134.4 million after tax. There was also an unrealised loss of $93.81 million in value of investments but such an item is taken to operating activities these days.
Tranz Rail's proposed capital raising has been seen as fair and sensible, while others say it should go to the wall. A third group favours Toll Holdings' takeover offer.
The arguments around Tower are based on GPG getting effective control of the company cheaply and that a total (or better than proposed) cash issue would be fairer.
No participant in those debates can avoid conceding that both companies need money and need it fast. Nor can they deny the fact the money is needed for survival and appropriate financial structures rather than expansion of the businesses. (Similar comments applied to Australian financial services group AMP and its recent fund-raising.)
Companies can get into trouble when trading turns against them or there is some other negative factor. Those matters apply to all groups. Few get into Tower/Tranz Rail situations.
The difference is financial management and cash management is the most important part. Financial management and cashflow are basic, simple and essential aspects of a business (or household) venture, despite attempts to complicate them with theoretical dross.
Recent events suggested Tranz Rail needed to improve general financial management. The company's report for the first nine months was issued on May 2. It said the company had made progress but was aware it needed to make greater gains in future. The report was short, understandable in view of the financial issues and proposed takeover offers.
Tranz Rail produced another profit forecast for the full year June 17, less than three weeks later. The company's record in recent times has been poor in most areas but its financial management and structure, including cashflow, were worse.
Similar comments apply to Tower, although it seems a solid dose of overoptimism was an element in that group.
The investor lesson in these cases is that reported profit and asset valuations are secondary matters compared with operating cashflows and debt-equity ratios.
Few companies give detailed analysts of those matters, on the success of which the business is based, in favour of extolling the overt. Investors should be seeking out the covert.
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