Airport 07

Two Transnational Corporate Takeovers
That Didn’t Take Off

- by Quentin Findlay

In the 1970s there was a penchant for large scale, overacted disaster movies. The most common of this genre involved airports or airlines. The scenario of the plots was typically that a plane or an airport would be threatened with disaster in some form through snowstorm, bomb threat or hijacking. After some tense standoffs and (perhaps) a few deaths to keep the plot line going, the situation would be resolved and the plane, airport and passengers would be free to live out the rest of their lives. I was reminded of this because the saga of the sale of shares in Auckland Airport Limited (AIA) to overseas corporate interests has much of the large scale, overacted and hammy plots of the airport movies.

There are no explosions in this story, only attempted financial hijackings. In this plot line, the public interest is being held hostage by two disparate international “villains” (one also acting as a jilted lover). The first (and erstwhile jilted beau), Dubai Aerospace Enterprises (DAE), offered to buy out other shareholders at a higher rate if they were willing to hand over a controlling interest (51%) to DAE. The second, and latest, entry is a bid from the Canadian Pension Plan Investment Board (CPPIB) which wants a 49% share in the airport. To add more spice to the story, since it has been “dropped” by AIA, DAE subsequently turned nasty and threatened to extract its (monetary) revenge on its former object of desire. There were also some bit players (such as Macquarie Bank and Australian Pacific Airports Corporation) who were rumoured to appear but have either not yet taken the stage or have decided not to perform.

Two Suitors

So what is the deal with the airport buyout? There are, or rather were two main contenders for AIA shares. The first was DAE, which is a privately held global aerospace manufacturing and services Corporation which was set up by the Dubai Government. DAE wants to become a major player in the international aerospace industry and it has some high powered investors backing it. Its backers include the Government of Dubai, the Dubai Stock Exchange, the property company Emaar, UAE Investment House Istithmar, Dubai International Capital, Dubai International Financial Centre, the Dubai Airport Free Zone Authority and, lastly, Amlak Finance.[1] The second contender is the Canadian Government in the form of the Canadian Pension Plan Investment Board. Like its New Zealand counterpart, the New Zealand Super Fund, the CPPIB invests in various companies and other institutions so as to return a tidy dividend to its contributors.

DAE announced its intentions to buy a majority stake in the Airport first. In mid May 2007, it got in touch with the Airport.[2] It then offered AIA shareholders what some financial commentators labelled a “complicated deal” to achieve a majority shareholding[3]. Simply, DAE proposed to buy shares for more than the market worth at that time ($3.80 per share) as well as creating a new company “MergeCo” to avoid some of the “pesky” legal issues that could impede its takeover. Primarily, this related to the requirement to get support from 90% of current shareholders under the Takeover Code[4]. DAE informed shareholders that for $3.80, they would receive $2.34 in cash, a new stapled security* (plus a loan note) in AIA and a fully imputed dividend from the present airport company of seven cents a share. It was hoped that enough people (including the Auckland and Manukau City Councils) would take advantage of this offer to enable DAE to gain anywhere between 51 – 60% of AIA shares[5]. * A stapled security is security that is contractually bound to one or more other securities to form a single saleable unit. For example a unit of shares in a company can be bound to unit of a trust and they must be purchased and sold together – Wikipedia.

The Canadians announced their proposals later, having been flushed out into the open by the DAE bid. CPPIB proposed three options. The first was an all cash buyout in which shareholders would be offered $3.70 for their shares (in early October, investment bankers Goldman Sachs JB Ware predicted that the price of the CPPIB share offer would be nearer $3.38 a share. They based this prediction on certain assumptions such as CPPIB only having a 40% maximum share holding as well as the issuing of more tax efficient stapled securities. Press 2/10/07 “Airport Offer Likely Worth 338c a Share”).The second and third options would be an offer of values up to $3.90 a share, through cash and other securities. The Canadians also apparently guaranteed that the Auckland and Manukau City Councils would retain their shareholding and gain representation on the Airport’s Board of Directors. In addition, the Canadians stated that they would issue new stapled securities[6].

Public Opposition Led To Dubai’s Hissy Fit & Exit

Over the next month public opposition to selling a majority stake in a key strategic asset to overseas interests mobilised (CAFCA was among the numerous organisations to come out publicly against it, with Murray Horton doing several major media interviews in the process. Ed.). In addition to public opposition, the dominant DAE bid ran into opposition from other shareholders such as the New Zealand-owned investment company, Infratil and both city councils. It also generated opposition from two New Zealand political parties in the form of the Greens and New Zealand First. The Government also reacted, with senior Minister and Auckland MP Phil Goff urging both Manukau and Auckland Councils not to sell their shares to DAE. However, it appears that the final nail in the coffin for DAE was when the Government-owned NZ Superfund along with Infratil purchased a 6.2% stake in AIA. This, when combined with the 10.05% owned by the Manukau City Council and the 12.75% owned by Auckland, effectively scuppered the proposed deal[7].

It was at that particular point that DAE threw what can best be described as a “hissy fit”. It threatened AIA with dire financial consequences under the merger implementation agreement that had been signed between the two parties. The merger agreement could have awarded DAE up to $4 million in compensation, if the agreement between the parties was terminated as a result of prescribed occurrences which were either within the control of the airport, or if the airport did not use its “best endeavours” to promote the deal[8]. DAE firstly claimed that the deal had been breached as a result of legal action being taken by Air New Zealand against AIA over monopoly pricing. However, DAE knew about this action in July and had never raised it as an issue[9]. DAE then claimed that AIA never did its best to promote the deal. However, this argument is somewhat disingenuous considering that AIA appeared to promote its relationship with DAE to such an extent that some commentators claimed that it drove off other potential suitors[10]. Like Elvis, DAE has now left the building. Only like a spiteful child, DAE has slammed doors and kicked chairs on its way out.

The Government & Winston Peters Set A Bad Example A Decade Ago

Of course, the sorry saga of airport sales to corporate interests has been going on for a considerable time. People with long memories will remember the controversial sale of the Government’s stake in Wellington Airport in 1998. A sale that the then Treasurer, Winston Peters, used as an excuse to end New Zealand First’s coalition with the Jenny Shipley-led National Government. I say excuse as what is not often remembered was that the same Winston Peters, who objected to the Wellington Airport sale, had previously signed off on the sale of the Government’s stake in Auckland Airport[11].

Originally, the airports were owned by the Government. Then, in 1988, the Fourth Labour Government corporatised the airports, effectively opening them up to privatisation at some point in the future. This subsequently occurred in 1998, when the National-led Government sold the Government’s majority shareholding. Until then New Zealand citizens, through the Government, owned 51.6% of AIA, five Councils owned 47.4% and Infratil owned 1% which it had purchased from the Rodney District Council. Like all “good” things that occurred through the 1980s and 1990s, the Government and its allies were advised by Treasury. They advised the Government to financially shake up the airports by selling their shares. Treasury, in turn was guided by a report compiled by transnational banking and financial corporation, Merrill Lynch (a saturation TV advertisement campaign to promote the share float was fronted by immediate past All Black captain, Sean Fitzpatrick. Ed.)[12].

In its 1997 Report to Treasury, Merrill Lynch noted that it had approached Infratil who, in turn, recommended a 40%/60% split of AIA. 40% would be held by local councils and Infratil, the remaining 60% would be a “free float”. What this effectively meant was that the dominant number of shares would be open to which ever large corporations fronted up with the necessary cash. At the time, the issue of foreign ownership was never considered (or rather it might not have been considered important) by either Treasury or Merrill Lynch[13]. This is mainly because it was more important to sell the assets rather than to whom they might be sold. Treasurer Winston Peters had apparently noted that it was possible that sold shares might be on sold to overseas interests by New Zealand investors, but discounted the idea of placing restrictions on share trading[14].

National Advocates More Privatisation

Auckland Airport Limited is also being used to champion another cause. In light of recent announcements by National Party spokesperson Bill English, various Rightwing economists and investment managers are seeking to soften up public support for the concept of partial privatisation of State-owned assets (another thing that CAFCA came out strongly against in 2007, once again gaining major media coverage. Ed.). Writing in the New Zealand Herald, investment analyst Brian Gaynor went on the intellectual charm offensive for the Right, talking up partial privatisation and using Auckland Airport Limited as a successful blueprint for the partial privatisation agenda. In an article titled “Privatisation is not a Dirty Word if said the Right Way”, Gaynor notes that the success of organisations like Auckland Airport is because it is subject to “…shareholder influence, the Takeover Code and NZX rules”. New Zealanders, Gaynor contends, would substantially benefit from this form of privatisation as it offers a better chance of “…keeping a company under New Zealand control and performing for the best interests of all stakeholders”. He notes that the protection given by the Takeover Code, NZX etc would ensure that “fickle politicians” would not be able to completely privatise an asset[15].

Despite the claim of “fickle politicians”, the reality of the Auckland Airport sales has been anything but. The original corporatisation and later privatisation of the airport was done by decidedly “unfickle politicians” who decided to pursue a political agenda, despite being opposed by the majority of the population. All that the Manukau and Auckland City Councils appear to have done is expressed the opinions of their respective electors. In the process undertaken by Auckland City Council to consider the deal, 90% of the submissions were either opposed to the sale or a reduction of the Council’s stake in the Airport. The Auckland Council Finance and Corporate Business Committee Chairman, Vern Walsh, noted that a number of submissions actually wanted the Council to increase or restructure the Council’s stake. He observed that “historically, the dividend from the airport has only averaged around 4% and that the Council was considering potential approaches that might improve the return on the Council’s investment”[16].

The opposition of the public is in stark contrast to the mood found in the financial pages of the mainstream media. They enthusiastically embraced the deal and decried those who opposed it. Winston Peters, (who is perceived by many to change his policies as often as he changes his double breasted suits) was singled out by a Listener editorial for his opposition. The editorial writer noted (both of the deal and the wider argument of foreign ownership) that “this is a time, not for xenophobia, but for balanced consideration of the case for foreign ownership”[17]. A comment by David Hargeaves in the Press was more open: “It [DAE] has been the victim of ill-informed xenophobic comment”.[18] The inference from these comments appears to be that the criticism and opposition against the Dubai and Canadian deals is rooted in nationalism and that people who are opposed to the Dubai and Canadian bids hold mistaken xenophobic beliefs.

It’s About Democracy & Local Control

However, the refusal to endorse the DAE deal and the issue with the proposed CPPIB tender is about the question of local democratic input and control. In the 1997 Merrill Lynch Report it had been noted that the Government should increase its investment by eight percentage points to 59%. The rationale behind this thinking was that any organisation that had 59% of the shares would also have four out of the six seats on the AIA Board. Further, the Report noted that 59% would also “ensure access to all company information in the sale process”.[19] In short, majority shareholding provides you with knowledge and information, which is power. While some financial analysts noted that DAE would have only held a minority of board seats (three out of eight),[20] its majority shareholding would have provided it with effective ownership of AIA, access to key information and the erstwhile ability to change the rules in the future. CPPIB has been coyer in its approach, perhaps as a result of the reaction to, and rejection of, the DAE bid.

But, even the “fairer” CPPIB deal with its emphasis on gaining a 49% stake in the Airport undermines what little control continues to be exercised by public. The reason for this is because a 49% stake holding in the company is effectively a majority holding. How such a situation could occur was (ironically) pointed out by Infratil. That company’s spokesperson, Paul Ridley Smith, remarked that: “In different companies, control passes at different points because of the dispersion of the shareholders. In a company with 52 000 shareholders with a dispersed share register, 49% is control”. Such an outcome was envisaged by the then Manukau Mayor, Sir Barry Curtis, who remarked that he would be “wary” of CPPIB having such a dominant stake as “…it would give them the ability to effectively control the airport in partnership with other small shareholders”. Instead Curtis preferred the shareholding of CPPIB to be no larger than 30 – 35%.[21]

The other flaw in the argument that democratic control would continue to be “safeguarded” by institutions such as NZX and the Takeover Code is revealed when they are examined. Certainly, the NZX does have a number of regulations governing its and its participant’s actions. However, NZX is not opposed to further privatisation or to increased foreign ownership of assets. As long as the proposed buyouts and transactions are done within the policies and regulations laid down by NZX, then it does not have a problem. Hence, it did not have a problem when DAE offered shareholders a higher bid for a majority shareholding in AIA. It does not have a problem with CPPIB wanting a majority stake in the airport either.

The less said about the weakness of New Zealand’s Takeover Code the better. So long as companies act within the “rules” prescribed by the Code then there is no issue. Indeed, the proposed takeover of AIA by DAE was to be achieved through a loophole in the Code, which allowed DAE to take a majority stake in the Airport through an amalgamation under the Companies Act. The use of amalgamations under the Companies Act meant that DAE only had to get 75% support, instead of the 90% required by offers under the Code. Subsequent attempts by Labour to amend the Code were blocked by National.[22] The message behind this is clear: if foreign companies really want to buy out a majority shareholding in a publicly listed asset or institution then they are free to do so.

In an attempt to limit such sales, Green MP and the Party’s Aviation Spokesperson, Sue Kedgley, has introduced a Private Member’s Bill to limit foreign ownership of strategic assets to 25%. The Overseas Investment (Restriction on Foreign Ownership) Bill notes that New Zealand has one of the most permissive ownership regimes in the world. Kedgley observed that New Zealand is “one of the only countries in the world without any rules on the foreign ownership of key strategic assets”.[23] While, Kedgley highlights a pressing problem with the existing legislation, there remains a problem with the Greens’ Bill. This is that the definition of what determines a strategic asset appears to change over time and with which Government is in control. In 1998, the Treasurer, Winston Peters, informed the then Opposition Finance Spokesperson, Michael Cullen, that the Airport was not a “strategic asset”. Ten years on, it has now been deemed a strategic asset.[24]

Canadian Offer Rejected, New Board Elected, Status Quo
(For Now)

On October 31st, the AIA Board announced that it had rejected the CPPIB bid. AIA’s official reason for its rejection of the CPPIB deal was that it would have the effect of tripling the Airport’s debt. Only one member of the Board, retiring Director Mike Smith, had supported the bid, stating that it needed to be put directly to shareholders. This is advice that CPPIB appears to have taken up. On November 6th, business news outlet Bloomberg reported that CPPIB had turned “hostile”, bypassing the Board and going directly to AIA shareholders. CPPIB was “…offering to buy a 40% stake in Auckland Airport for NZ$3.66 a share in cash … [which] is higher than the stock has ever traded. The bid values the airfield at NZ$4.47 billion” (“Canada Pension Seeks 40% Stake in Auckland Airport”, http://www.bloomberg.com). The Canadians, with ten people working on their bid, were staking their hopes on AIA’s November 20th Annual General Meeting (AGM).

Throughout November, prior to the AGM, both Infratil and the New Zealand Superannuation Fund lifted their shareholdings in AIA to a crucial total of 7.7%. Auckland City Council, while opposing selling its shares (John Banks, re-elected as Mayor after one term in the political wilderness, opposes any sale and has publicly regretted selling down the Council’s stake during his previous term), has announced its support for “some form of amalgamation”. The Council’s Chief Financial Officer, Andrew McKenzie, said that the proposal from CPPIB might add “value” to the Airport and that the structure that CPPIB was looking at “fitted within the criteria” that the Council was examining in terms of future ownership of the Airport. However, he noted that any structure needed to be worked through prior to acceptance (National Radio, Morning Report 8/11/07).

Investment analyst, Brian Gaynor, commented on the same Morning Report segment that the new CPPIB bid could have the effect of flushing out yet other bidders. Gaynor feels that there is lot of interest in the Airport and thinks that there could be other bids from another party in the near future. Either way, he commented, “this story has a long way to go before reaching a conclusion”. However, as a result of the AIA’s November 20th AGM, the Canadian bid is now considered by analysts and the media to be a dead duck. Three new Directors were elected to the Board by shareholders – one each as nominees of the Auckland City and Manukau City Councils and the third was Lloyd Morrison, the high profile Chief Executive Officer of Infratil. The writing was on the wall for the previous Directors who had so assiduously sought to flog off the public asset entrusted to their care (personally I reckon that old Board is worthy to be nominated in the Roger Award’s new category of Accomplice. Ed.). The Chairman, John Maasland, promptly resigned, the day before the new Board’s first meeting. According to media reports, he jumped before he was pushed.

The objective of the sale of Auckland Airport Limited was not about providing “ordinary” Mums and Dads with a share in the Airport as touted by its Rightwing apologists. It was actually about denying them the right to have any such ability. The real owners (and beneficiaries) are the majority shareholders who are, more often then not, large transnational corporations. The original disaster movies were loose on plot and, as the genre wore on they became increasing more comical. The situation at Auckland is decidedly less comical and more serious. Auckland Airport 07 had, and maybe still has, the potential however to be a real disaster, not only for the immediate stakeholders but for the country at large.

Endnotes:


[1] Press, 24/7/07, “AIA saga not over yet”, Andrew Janes.

[2] Press, 28/7/07, “Four cleared for take-off?” Andrew Janes.

[3] Press, 25/7/07 “Dubai’s AIA Deal Complicated but Good”, Bruce McKay.

[4] Ibid.

[5] Press, 24/7/07, “AIA Saga not over yet”, Andrew Janes.

[6] Press, 20/9/07, “CPPIB Proposal involves Board Seats for Councils”, Andrew Janes.

[7] Press, 1/9/07, “Suitor Claims Deal Breached”, Andrew Janes.

[8] Ibid.

[9] Ibid.

[10] Press, 1/9/07, “Airport to Pay as Bid Falters” David Hargreaves.

[11] Press, 26/7/07, “Peters admits slip in Airport Sale” Colin Espiner.

[12] Press, 29/8/07, “Ownership Issues not discussed”, NZ Press Association.

[13] Ibid.

[14] Press, 26/7/07, “Peters admits slip in Airport Sale”, Colin Espiner.

[15] New Zealand Herald, 29/9/07, “Privatisation is not a Dirty Word if said the Right Way”, Brian Gaynor.

[16] Press, 22/9/07, “Most Oppose Sale of Council’s AIA Share”, NZ Press Association.

[17] Listener, 4/9/07, “Hello Dubai”, editorial.

[18] Press, 1/9/07, “Airport to Pay as Bid Falters” David Hargreaves.

[19] Press, 29/8/07, “Ownership Issues not discussed”, NZ Press Association.

[20] Press, 25/7/07 “Dubai’s AIA Deal Complicated but Good”, Bruce McKay.

[21] Press, 4/9/07, “Canadians may find it hard to get 49% of Airport”, Andrew Janes.

[22] Press, 25/7/07, “Takeover bid uses loophole left open by National Opposition”, Gareth Vaughan.

[23] Green Party Media Release 6/9/07, “Goodbye Dubai, Auckland Airport must be under New Zealand Control”.

[24] Press, 26/7/07, “Peters admits slip in Airport Sale” Colin Espiner.


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