KEY POINTS:
The sale of a chunk of Auckland International Airport should be put on ice and a new sales process begun after the airport's AGM next month, says Infratil executive Tim Brown.
Three new directors, including Infratil managing director Lloyd Morrison, are likely to be voted in on November 20.
Some international investors have shied away from bidding for a stake in Auckland International Airport (AIA) after the "embarrassing" treatment of Dubai Aerospace (DAE) this year.
"We have spoken to people who would like to have been there but did not like the process," says Brown.
If all key shareholders had sanctioned the sales process from the start, those parties would be more interested, says Brown. One AIA shareholder says DAE was subjected to a "revolting beauty parade" to decide whether the shareholding councils liked the company or not.
Infratil said the process was not transparent enough. Now, with NZ Super Fund, it hopes to gain more influence over the vetting of a new major shareholder when Morrison is voted on to the airport board.
The company announced Morrison's nomination at the same time as the two shareholding councils, Manukau and Auckland cities, announced they had nominated John Brabazon and Richard Didsbury respectively.
If the new board does start from scratch, the bid being put together by the Canada Pension Plan Investment Board will have to go back and join the queue. But Infratil has not been over the moon about the Canadian $3.70 a share offer, yet to be formally made. "Our view is it could be better," says Brown.
Infratil will be happy to work with a cornerstone shareholder, he says, but that shareholder will have to add value to the airport, rather than be a passive investor. Ideally, it would have a bunch of bright ideas and bring with it relationships with other airlines, he says. And if a new shareholder thinks it can add value, it might buy at a higher price.
There is little doubt that Infratil, the majority owner of Wellington Airport, would have liked to gradually built up its stake in Auckland Airport - it owns $100 million of shares while NZ Super's stake is worth $200m.
Infratil harboured hopes some of AIA's Australian shareholders would lose patience with their investment and sell in the next few years.
It has historically built up shareholding in investments such as TrustPower, in which it took 13 years to acquire a 50.5 per cent stake. "We are a very patient and longer-term investor, happy to wait years or decades before ending up in an influential position," says Brown.
"We have eggs in a relatively small number of baskets, and we do as much as we can to push them along."
Rob Mercer, Forsyth Barr's head of research sees value in Morrison taking a place on the AIA board.
"It would be better to have them [Infratil] on the board and bring forward a deal that gears the company properly, and creates some value back for shareholders," he says.
Goldman Sachs JB Were analyst Matt Henry thinks the three nominated directors have a good chance of being voted in. "I would imagine there is a reasonable probability that they will be voted in," says Henry. "Between them they own about 30 per cent of the airport and there are three vacant seats available on the board."
Brown says Morrison has two important attributes. "Nobody in New Zealand has more experience on Australian, North American, UK, continental European and New Zealand airports. The other thing he brings is a track record of working very productively with local government."
A lot of New Zealand investors are wary about partnering local government, says Brown, but Infratil has a strong record in this, with TrustPower and Ports of Tauranga.
"You talk to to a lot of fund managers who [say] 'bloody Manakau' - our view is the local communities have a legitimate interest... we want to make sure that interest is constructively recognised," he says.
While Infratil is believed to have a good relationship with Manukau, Auckland City Council could be less predictable. Didsbury would be a welcome addition on the board but new mayor John Banks is more of an unknown quantity.
"From past experience we have found him to be a guy who is definitely capable of seeing the bigger picture but [we] don't know what that bigger picture is," says Brown.
An Auckland City Council spokeswoman says Banks is waiting until he is fully briefed before making any comment on the airport. Earlier this year he described the failed sale process with DAE as "a dog's breakfast", and last week told the press he had been contacted by Infratil's lawyers to discuss the airport.
Some fund managers believe there will be a conflict with Morrison being involved with Auckland and Wellington airports.
"We would want a strong board of independent directors," says Simon Botherway, executive chairman of Brook Asset Management, where fund managers have discussed how they will vote on the three nominated directors and decided they need more information.
Botherway thinks restarting the sale process is a reasonable approach.
He has publicly criticised the Canadian Pension Plan Investment Board and the way it has disclosed information about its bid.
But Infratil's executives are not devoting all of their waking hours to Auckland Airport. The company has plans for Wellington Airport, which AMP Capital Investors' senior portfolio manager, Guy Elliffe, believes can only benefit from the interest in Auckland Airport. Infratil owns a 66 per cent stake, while the Wellington City Council has a 34 per cent shareholding.
"We have focused on value for money and a better quality product," says Brown. "We are looking at different audiences and providing something for all of them. Passengers are spending $4 each as they go through the airport, buying a magazine or a coffee. It used to be $1. We've worked with Wellington City Council, have had Kerry Prendergast on the board for the past six years, and we've been extraordinarily productive."
Henry says Wellington's shareholders have done a good job. "It's well-run airport, and has been a great asset. They've raised aeronautical charges."
And using its experience with airports it owns in Europe, Infratil is introducing a new carparking system in Wellington, which it started in Glasgow. Its European airports - including Glasgow Prestwick, Kent and Lubeck - are long-term investments.
Brian Gaynor, Milford Asset Management's investment strategist, says: "The European airports are not doing great. The problem is when it got into Europe [as a] small NZ company, it had to pick smaller airports."
Meanwhile, Infratil remains a stock exchange darling thanks to the success it has had with TrustPower and Ports of Tauranga.
"TrustPower is a well-run business... generating assets to position itself to invest in further capacity, which is in line with what the Government wants," says Mercer. "There are good incremental projects on the hydro side and good wind projects."
Gaynor is impressed with Infratil's team. "A lot of people in the industry compare them with Guinness Peat Group," he says. "GPG is ageing. Lloyd is nearly 50 and the rest of the guys are younger.
"They have more energy and have picked their position. The challenge is, where do they go from here?"
