Asset Sales: two down, three to go!
Oh dear, National seems to be in a spot of bother over it’s planned partial privatisation of five SOEs…
One state owned enterprise, Solid Energy, appears now to be off the sales list. According to Finance Minister Bill English,
On top of that, there appears to be a real questionmark over the sale-value of Air New Zealand, as well, according to outgoing chief executive Rob Fyfe,
“However, outgoing chief executive Rob Fyfe has said he would be “surprised if the Government would be wanting to sell” at the current low share price.
The company was in the midst of a “cyclical low” on its share price, Fyfe said in June.”
Fyfe is correct.
A look at Air New Zealand’s recent and longer term share price history shows that it has been badly affected by the Global Financial Crisis (GFC).
In 2007, Air New Zealand’s share price stood at $2.47 a share,
At the end of trading (22 Aug), today, that share price stood at 92.5 cents each. That’s a loss of $1.545 per share,
In fact, the share price dropped from 94.5 cents a share yesterday (21 Aug) to it’s current level of 92 cents.
Looked at another way; it’s like having your home valued at $247,000 in 2007, prior to the onset of the GFC – and having it valued at only $92,500 today.
Not a good environment to be a seller.
NOTE: It is interesting that, of all the SOEs, Air New Zealand is the only one that has a small, privately-owned component. The state owns 73.13% of Air New Zealand, other investors own 26.87%.
This situation is a ‘quirk’ of Air New Zealand’s re-nationalisation in October 2001, when it faced collapse under a massive $NZ1.425 billion operating loss incurred by then-private owners.
So it’s current share value is a relatively true reflection of it’s present market-value. There is no “guesswork” involved, as Bill English revealed in February this year, with the other four SOEs,
Helluva way to run an economy…
Most sane people wouldn’t sell at such a ridiculously low price and would wait for the market to recover.
However, despite misguided belief, National’s commercial nous is vastly over-rated. In fact, some of their commercial decisions have been absolutely apalling.
The most famous being that these assets – especially the power companies – actually return a higher dividend to government than would be the cost of borrowing that same money. As BERL reported in May,
” Partial asset sales will do nothing to curb New Zealand’s growing debt problem, a new report by economic analysts Berl says.
The Berl report, commissioned by the Green Party and released today, says the Government’s partial asset sales programme to build new assets would leave the Crown accounts ”permanently worse off”.
Government debt, the ratio of debt to assets, net worth and total assets would all be worse off after the programme was carried out, Berl found.
”The interim loss of earnings resulting from reduced dividends and the period of time before the new assets reap benefits is never recouped,” the report said.
”Subsequently, the option of asset sales can only significantly improve the Government’s accounts if a set of assumptions are adopted that are at the extreme ends of plausibility“.”
The up-shot? Unless the global economy stages a miraculous recovery in the next two years (about as likely as The Second Coming or Klingons camping out in my backyard), and National ministers are dumber than I thought, Solid Energy and Air New Zealand can be scratched from the privatisation agenda.
Added to this, is a brewing toxic mess involving commercial interests and Treaty claims over water rights…
At the beginning of August, Key realised that the partial-sale of SOEs was not going to go smoothly. Until now, state owned power companies were exploiting water resources for the benefit of the nation as a whole.
Maori were content with that status quo; for as long as no one owned the power companies – they were owned by us all – the same could be said of water.
But the moment that private ownership of hydro-power generation was mooted – the situation changed. Water would be used to generate power, which would be sold, and would deliver profits to private owners.
Saying that “no one owns the water” that hydro-power stations use is akin to saying no one owns the coal or gas that are used in coal-powered and gas-powered stations. Ridiculous.
The Waitangi Tribunal will shortly be delivering it’s response to Maori Council claims over water rights.
Most likely, the Tribunal will find in favour of Maori. This blogger can conceive of no reason why this should not happen, and just as land can be owned – so can water rights.
It’s a bit late-in-the-day for capitalist National voters and politicians to now be claiming socialist principles of “collective ownership”. That just ain’t gonna wash, Jethro.
If National over-rules the Tribunal findings, then Maori will go to Court – the High Court to be precise. Of all Pakeha institutions, Maori have a great affinity for the legal system. They know how to use it for greatest advantage.
Going to Court will have one result; a lengthy delay in the asset sales programme.
On 22 August, National admitted what the rest of us already knew,
” The Government says it is going to have to start making judgments about how much of its partial asset sales programme can be completed in this term of office…
[abridged]… Finance Minister Bill English says the Government also has to deal with other issues, such as the Waitangi Tribunal report on water rights relating to the partial sale of Mighty River Power, and possible legal action.
Mr English says he is not taking it for granted that the Government will be able to complete the full programme this term. “
And as if that was not enough to put a spoke in the wheels, two corporate interests have recently made announcements that could have a significant impact on share prices for the remaining three SOEs; Mighty River Power, Meridian, and Genesis.
Norske Skog Tasman
” Norske Skog Tasman’s plan to halve newsprint production at its Kawerau mill will have implications for the power generation industry if it goes through with it, says an industry analyst.
The company, which accounts for about 2.9 per cent of New Zealand’s power demand, is looking at cutting its annual production to 150,000 tonnes from 300,000 tonnes because of dwindling domestic and offshore sales.
The analyst, who requested anonymity, said the partial closure would further extend the “significant” generation over-capacity in the New Zealand electricity market.
A 50 per cent reduction in Norske Skog Tasman’s electricity demand would equate to about one year of demand growth estimated in Ministry of Economic Development forecasts. “
By coincidence, Norske Skog buys most of its power from Mighty River Power, which is the first SOE that National plans to partially privatise.
Any potential “mum and dad” investors may be warned off from investing in MRP shares. If Norske Skog proceed with their plans, power consumption will decrease dramatically – and so will profits. Which will mean a cut in dividends paid to shareholders.
Tiwai Aluminium Smelter
Perhaps the ‘nastiest’ surprise for National and it’s Dear Leader was this announcement on 11 August from multi-national conglomerate, Rio Tinto,
” Meridian Energy’s announcement that it had been approached by New Zealand’s biggest power user, Rio Tinto, to discuss potential changes to its supply contract has created uncertainty for the Government’s plans to partly privatise the three power generators, analysts said.
State-owned South Island power generator Meridian said it had been approached by Pacific Aluminium, a business unit of Rio Tinto, the majority shareholder of New Zealand Aluminium Smelters (NZAS), to discuss potential changes to the electricity contract with the smelter.
The statement comes a time when Rio Tinto is assessing its options for the NZAS smelter at Tiwai Pt.
Tiwai takes about 15 per cent of New Zealand’s electricity, so the prospect of changes to the contract between Meridian and Rio was enough to send Contact Energy’s share price down 20c to $4.80 on Thursday.
Few in the financial markets expect Tiwai Pt to close, but if it did, much more power would be added to the national grid, depressing prices and affecting the profitability of all the power generators. “
Rio Tinto’s announcement immediatly sliced 20 cents off Contact Energy’s share price. What will it do to the three state owned power companies?
It’s hardly surprising, really. Everyone else appears to be putting their hand out, or up, to gain benefit from the asset sales – why not multi-national corporations who are already parked here in our country?
The Herald report goes on to say,
” Morningstar analyst Nachi Moghe said there was ongoing concern about the feasibility of Tiwai Pt and the possibility that it might eventually shut down.
“Obviously, if that happens it will hurt everyone, but it will hurt Meridian the most,” he said.”That additional supply will throw the supply-demand balance out of kilter.”
One fund manager said the news was a “bolt from the blue”.
In the contract negotiations, he said, the pressure could go on Meridian to reduce its price, or to reduce the volume of power it supplies, which would have an impact on the wholesale electricity market.
“It’s poor timing but great timing on behalf of Rio Tinto as we go into the mixed ownership model process,” said the fund manager, who did not want to be identified.”
Rio Tinto appears to be exploiting current uncertainties and confusion in the current environment. As pressure mounts on National from every direction, this appears to be an opportune moment for corporations to start flexing their own muscles.
Just what the Nats needed – their own corporate allies to shaft them at the worst possible moment.
Capitalism. Ya gotta laugh.
And the most critical factor to impact on the electricity generation industry: the weather.
This is something that even the “invisible hand” of the free market is utterly powerless to influence. Meridian’s profits have already been affected,
” The worst inflows into its hydro lakes for 79 years took a toll on Meridian Energy’s earnings in the year to June 2012.
The state-owned generator and electricity retailer yesterday reported a net profit after tax of $74.6 million, down from $303.1 million the year before.”
At this point, Dear Leader John Key might be starting to wonder. With all these ‘forces’ ranged against his Party’s plans to flog off our state assets – perhaps the Fates are trying to tell him something?
This blogger is surprised that China and Australia – both nations with which we have Free Trade Agreements – have not put their hands up to line up and buy shares.
After all, that is what FTAs are about. Legally, we might not be able to stop them.
Will we be hearing from our Chinese and Aussie cuzzies next?
Watch this space.
= fs =