Investors punish Air NZ over Ansett takeover

By YOKE HAR LEE

Air New Zealand yesterday confirmed this year's worst kept secret saying it would pay $A580 million ($744.54 million) to take full control of Ansett Australia.

The unexpected element of the deal was that Rupert Murdoch's News Corp, seller of the 50 per cent stake in Ansett, would take a 10.5 per cent stake in Air New Zealand as part-payment.

Combining Air NZ with Ansett will create the 20th largest airline in the world.

Air NZ said cost savings and synergies would improve pre-tax profits by up to $A200 million a year, phasing in over the next one to three years.

But investors reacted badly to the deal, knocking down the price of Air NZ A and B shares. They were wary that Air NZ would within six months of its first payment, go to the market to raise up to $290 million in an underwritten rights issue to help fund the purchase.

Air NZ A and B shares lost 14c and 20c respectively to $1.90 and $2.05. Standard and Poor's yesterday downgraded Air NZ's rating on the news.

As Air NZ chairman Sir Selwyn Cushing had previously indicated, Singapore Airlines was not a party to the current transaction. Singapore had offered News $A500 million for the stake but Air NZ had exercised its pre-emptive rights.

In Melbourne yesterday, Sir Selwyn reckoned Air New Zealand paid a fair price. He said he was also pleased that the deal included News Corp continuing with an equity investment in Air NZ.

News Corp chairman Lachlan Murdoch said: "News is pleased to have reached this agreement as it will enable us to retain an exposure to the merged Ansett/Air NZ group."

Air NZ managing director Jim McCrea said the emerging Australasian airline would retain the two strong brands it already held and would develop them.

Within two to four years after the first cash payment, Air NZ will issue to News shares amounting to a 10.5 per cent stake. In special circumstances, Air NZ or News may decide to make a cash deal. At yesterday's price, the share would be worth around $A100 million.

Sir Selwyn said: "The pricing formula provides Air NZ and News with flexibility in deciding the method by which the second payment to News will be made. It also scales the second payment to the market value of the integrated business at the relevant time."

The transaction excludes News Corp's 100 per cent-owned Ansett New Zealand, News' stakes in Ansett Worldwide Aviation Services and an aircraft leasing business owned by News/TNT Ltd. The transaction also does not change the 51 per cent ownership of Ansett International by Australian investors.

Jason Smith, aviation analyst at Salomon Smith Barney, based in Sydney, said: "Given the synergy benefits that Air NZ should be able to access and the fact that Singapore Airlines wasn't going to be paying a control premium, the overall price has to be reasonably fair."

He said Qantas would remain a strong competitor. "It is a vigorous, very fast-reacting competitor. I think it [Qantas] is probably taking in quite a bit of comfort that it is Air NZ doing it, rather than Singapore."

Rod Eddington, executive chairman of Ansett Australia, will join the expanded board while Mr McCrea will be group chief executive officer and managing director. Mr Eddington will leave Ansett after the integration exercise is completed.

Leslie Brown, a law lecturer at Victoria University who has been following Air NZ's developments, said: "The pricing formula would appear to bridge the gap between what value News places on Ansett and where Air NZ sees the value. It is an interesting way to overcome the gap over the view of what the price should be."

Mr McCrea said an integration management team would be formed to integrate the two operations.

Reacting to Australian media speculation of 3,000 potential job losses as a result of the deal, Mr McCrea said the number was "misleading."

He declined to give a number although he conceded there might be overlaps in the back offices of the two airlines.

He was more keen to point to the fact that the integrated airline was aimed at creating growth.

* Additional research by Susan Jennison.