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Hart needs quick victories in Baghdad and Ballarat

By Shoeshine

Friday 14th March 2003

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Those who recall this column of January 24 ("Hart's Goodman bid looks doomed to failure") might expect to find Shoeshine tucking into a hefty slice of humble pie. In fact he's sticking to the chicken and mushroom variety The French Bakery on Vulcan Lane does so well.

The excuses for doing so might, to the ungenerous-minded, look a tad weaselly.

For one thing, Burns Philp's Goodman Fielder bid was at that time conditional on acceptances for 90% of the shares. Burns hasn't got there yet by a long chalk so it's a bit premature to acclaim its "victory."

Shoeshine's rationale was that the institutions holding big Goodman share blocks would in many cases have to hold shares in the merged company because of its weighting on Australian and New Zealand share indices.

They would be reluctant to swap shares in a lightly leveraged Goodman that was at last showing signs of turning in worthwhile profits for a debt-laden Burns/Goodman with few synergies and no articulated strategy.

Since then Burns has been forced to cut the acceptance level con dition to 50.1% and it now looks as if it faces a long struggle to persuade the hold-out shareholders to come on board.

Among these are the two biggest institutional holders, Perpetual and Maple-Brown Abbott, with about 20% between them.

Assuming Burns gets its way on board representation or drops this condition, it will be the proud possessor of 54% of the shares ­ a precarious position and it could yet get worse.

Burns' bid for 100% was to be financed by a massive $A2.4 billion of additional debt, taking net debt for the merged group to $A2.7 billion.

At 53% it will have to draw down only $A1.3 billion and will have to service $A1.6 billion. The bill rises with each further 1% of Goodman it gets. At just below 90% it will have nearly $A2.5 billion to service.

But until it reaches 90%, if it ever does, it won't get its hands on Goodman's cashflows of about $A330 million so it will have only its own cashflows of about $A250 million a year to pay the interest bill.

Even with board control, a foregone conclusion, the position will still be tricky.

Analysts expect it to rip through head office overheads and any other expenses it can find but Goodman has been on a concerted cost-cutting push for two years now. Last year it reckoned it produced $A50 million of net productivity benefits and it's unclear how much more fat there is to trim.

To reduce the debt burden Burns could sell Goodman assets. It has already ruled this out but don't bet it will stick to its promise if things get tough.

It could also up the 7.5Ac dividend payment or buy back shares ­ or return capital to shareholders, a carrot Goodman's board had already dangled in an effort to convince shareholders to resist the bid.

There's no reason to believe Burns won't eventually get to 90% of Goodman, even if it has to wait a year or so and launch a higher mop-up bid.

But in the meantime Burns boss Graeme Hart will have to hope things don't take a turn for the worse.

Economic pundits reckon the cost of a prolonged war in Iraq, in cash and confidence, will at least slow down the US and European economies and might even tip them into recession.

With operations in 25 countries the merged group wouldn't be immune.

Air New Zealand's underarm ball?

It will be interesting to see what new "concessions" Air New Zealand offers to transtasman regulators if, as chief executive Ralph Norris and finance minister Michael Cullen both think likely, the alliance with Qantas is knocked back.

Among those tracking Air New Zealand's flight some harbour growing suspicions about Mr Norris and his fellow directors' true intent.

The airline's insistence that, without a ceasefire agreement, it faces a "war of attrition" with Qantas that it can't hope to win has always drawn a sceptical response. But why, if Norris doesn't truly believe the Doomsday scenario, would he be cuddling up to his arch-enemy?

Whichever way things go, the long drawn-out alliance process is doing Air New Zealand no harm.

From the brink of collapse it recovered in the December half year to a still-modest $94 million profit. This week's January operating statistics show the improvement is continuing. For the seven months to January traffic was up 7.9% and the load factor rose by 6.6%.

Admittedly a tailwind of a favourable exchange rate, lower maintenance costs, and the shedding of the Ansett albatross has helped. But cost-cutting and initiatives such as the new Express Class are also playing a part.

Cashflows have recovered strongly, allowing the airline to make worthwhile inroads into its debt burden.

It has been talking to Qantas since at least May last year. If the alliance is knocked back by regulators, submitting a new application and going through the approval process could take until the end of this year.

So Mr Norris will have bought himself some 18 months of breathing space. It couldn't be, could it, that he's been leading the Aussies by the nose?

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