Hold The Front Page!

Major TNC Takeover Vetoed

- by Quentin Findlay

Sometimes things are exactly as they seem. Late last year, in the aftermath of the 2008 General Election, something extraordinary appeared to happen. A proposed sale of domestic business rights was declined by the Overseas Investment Office (OIO). In September 2008, Cheung Kong Infrastructure Holdings (CKI) a Hong Kong-based company had announced that it intended to buy the ironsands export business of New Zealand Steel Mining Ltd. New Zealand Steel Mining is a subsidiary of BlueScope Steel Ltd, which is an Australian based company. It mines the ironsands at Taharoa, 200 kilometres south of Auckland and has done since 1972. The company employs 40 staff at this facility and it ships about 850,000 tonnes of ironsand annually to steel mines in China and Japan. In 2008, New Zealand Steel Mining Ltd reported annual revenue of $53 million (NZ) and net profits of $11.5 million (NZ) from the Taharoa business.

All in all it appeared a very tasty morsel for CKI holdings, which was prepared to pay New Zealand Mining $250 million for its Taharoa business, which would be annexed to the CKI investment empire. For while Cheung Kong Infrastructure Holdings Ltd and its chairperson, Mr Victor Li (son of tycoon Li Ka-shing) may be based in Hong Kong, CKI is a large transnational corporation (TNC) which owns power and water utilities, hotels, telecommunications and property in addition to other interests in 56 different countries.  As CKI’s states on its company Website :

“CKI is the largest publicly listed infrastructure company in Hong Kong with diversified investments in Energy Infrastructure, Transportation Infrastructure and Infrastructure- Related Business. Operating in Hong Kong, Mainland China, Australia, the United Kingdom, Canada and the Philippines, it is a leading player in the global infrastructure arena“.

In 2008 CKI brought out Vector Limited’s Wellington electricity assets for $785 million and now owns Wellington’s electricity distribution network. This network supplies power to Wellington, the Hutt Valley and Porirua regions. Since Vector is the largest electricity and gas distributor in the country, the acquisition of Vector’s Wellington assets provided CKI with a substantial foothold in this country’s energy infrastructure. 

The acquisition of the Taharoa outlet would have gained CKI even more of a grip on the country’s infrastructure. While the OIO report on the deal notes CKI’s considerable investment in the infrastructure area, it further noted that the buying of New Zealand Steel Mining’s “securities” would enable CKI to extend its material business beyond its current investments in Asia. Presently, the Taharoa mine supplies tonnage to a “North Asian customer base”.

So What Went Wrong?

In late September 08, when the impending buyout was announced, it appeared that it was a done deal. The media release which appeared on the Ministry of Economic Development’s Webpage stated as much, with a broad headline proclaiming : “NZ Steel sells Taharoa Ironsand export business to Hong Kong Firm”. Gaining Overseas Investment Office approval appeared to be a mere technicality. However, the OIO decided to “decline” the buyout with the result that Taharoa remained in the hands of New Zealand Steel Mining Limited. Bill English, at that time the incoming Minister of Finance, was quick to release a media statement which appeared to suggest that he, as the new Minister had played a role in the rejection of the deal :

“Mr English said that the application had been declined because CKI did not meet the Overseas Investment Act 2005 criteria of substantial and identifiable benefit which was relevant to the acquisition of business assets which included sensitive land”.

For those with long(ish) memories, this criterion was used by former Cabinet Ministers, David Parker and Trevor Mallard to deny the CPPIB (Canadian Pension Plan Investment Board) a stake in Auckland Airport. Citing the “national interest” both Ministers used the Act to effectively kill the CPPIB bid and end months of public and private outcry. For full details, see Quentin Findlay’s “Government Vetoes Takeover Of Auckland Airport : A Tale Of High Adventure And Limpets”, in Watchdog 117, April 2008, online at http://www.converge.org.nz/watchdog/17/02.htm and “Round And Round The Mulberry Bush : Auckland Airport and Treasury Advice”, also by Quentin, in Watchdog 118, August 2008, online at http://www.converge.org.nz/watchdog/18/03.htm. Ed.

Some people may have seen in Bill English’s statement, an omen that perhaps National might have a more progressive line than Labour in terms of its treatment of domestic land or commercial sales to overseas interests. I even heard some people speculate that National might, unlike its liberal predecessors, harbour protectionist instincts. Sadly, this was not the case (if indeed it ever was). The new National administration has made it quite clear that it wants to press ahead with the sale of domestic owned assets to overseas buyers. In fact, it feels that the current Overseas Investment Act (OIA) is actually too prohibitive and wants it further liberalised (see cover story. Ed.). Bill English has noted that apparently the current rules are “complex and the process involved in considering applications for overseas investment takes too long and create[s] uncertainty”.

It’s The Recession, Stupid

However, the real “mundane” reason that CKI could not buy New Zealand Steel Mining Ltd’s Taharoa facility has to do with the worldwide global recession. The OIO made that point clear in its decision noting that CKI could not satisfy the criteria of sections 16 (criteria for consent for overseas investments in sensitive land) and 18 (criteria for overseas investments in significant business assets) of the Overseas Investment Act. These sections of the Act make it quite clear that certain financial considerations need to be met. CKI decided that it could not meet those considerations and made the fateful decision to withdraw from the sale as its “ plans to expand the business are no longer viable”. As CKI Chairperson Victor Li notes in his recent Chairperson’s report : “The global financial crisis has touched almost all markets and industries in the world and the Group has felt its effects as well”. Bill English put it more succinctly noting that “current global economic conditions” affected “the business operations of the proposed investment”.

Simply, the world recession has made it too risky to financially invest in an industry that is itself in a slump. New Zealand Steel Mining Ltd’s Australian parent company, BlueScope, admitted in December 2008, that its own sales had slumped by 25% between October and November and that it had been forced to shut down one of its Australian blast furnaces earlier than expected. It was facing having to raise $A300 million and was forcing its staff to take “extended” Christmas leave. One suspects that this might have been the reason that BlueScope was scaling back its New Zealand involvement

However, the door remains open for CKI to press forward with the buyout at some point in the future after the recession has eased and the prices for steel on the global market re-stabilise. Further, the New Zealand/China Free Trade Agreement, signed by the last Labour government and strongly endorsed by the then National Opposition, provides particularly easy access for Chinese firms into the New Zealand economy. Both countries are pledged to conditions which treat investors and investments of the other country as least as well as they treat their own domestic investors and investments. 

China and its industries, both public and private, desire investment and they particularly desire investment in infrastructure. It is this type of investment as the New Zealand Herald’s Fran O’Sullivan notes, is a major driver of the Chinese economy. Mary Boyd, the Director, Corporate Network, Economist Intelligence Unit, informed a New Zealand Trade and Enterprise Seminar being held in Beijing in early April 2008 that China’s fixed asset boom had begun in the 1990s and that “fixed asset investment” (FAI) was driving the Chinese economy. To drive this point home, Ms Boyd noted that for 2007, the rural FAI was up 21%, urban FAI was running at 26% and real estate at 30%. 

They’ll Be Back

While the Government might claim that the rewriting of the “repressive” OIA will make it (even) easier for firms like CKI to sink their teeth into sections of New Zealand’s economic infrastructure, it should be remembered that the current rules in the OIA did not stop CKI from buying up Vector’s Wellington assets. CKI and its ilk see New Zealand as a significant market for investment. This viewpoint was nicely summarised by the OIO in its Decision Summary :

" New Zealand has always represented an attractive investment option for CKI due to its stable regulatory regime and business culture being similar to other common law countries, in which CKI already holds significant investments. This proposed Investment signals further the Applicant’s commitment to New Zealand".

I have little doubt that CKI and others will be back once the current economic upheavals have been resolved.

Sources :

Bell Gully Media Release : “Minister appoints Bell Gully partner to Government overseas investment advisory group”. From http ://www.bellgully.com/resources/resource.02125.asp

BlueScope Steel Limited. From http ://www.bluescopesteel.com/

New Zealand Herald, 18/12/08, “$258 Million Sands Deal Shelved by Global Meltdown”, Grant Bradley. 

Cheung Kong Infrastructure Holdings. CKI Annual Report and Chairman’s Letter. 19/3/09.

Land Information New Zealand; Overseas Investment Office : Decision Summary Case : 200820037 - Cheung Kong Infrastructure Holdings Limited and Ironsands Investments Limited (CKI).

New Zealand Herald, 11/3/09, “NZ Trade Deal Low on Envoy’s to Do List”, Fran O’Sullivan.

New Zealand Herald, 9/4/08, “Vector Bid a test of Loyalties”, Fran O’Sullivan.

Ministry of Economic Development – Crown Minerals. Media Release : “NZ Steel sells Taharoa ironsand export business to Hong Kong firm”. From http ://www.crownminerals.govt.nz/cms/news/2008/

New Zealand Cabinet Media Release : Purchase of NZ Steel Assets Declined. 17/12/08.

New Zealand Steel Limited.  From http ://www.nzsteel.co.nz/

Vector Limited. From http ://www.vector.co.nz/

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