The battle of Auckland Airport

To many of those old enough to remember it before it came out on DVD, Battle of Britain is one of the finest war movies ever made. Guy Hamilton's patriotic paean to the pilots who risked - and in many cases lost - their lives for the sake of their countries starred a who's who of British talent and was notable for two things: its spectacular dogfights in the days before computer-generated images, and its willingness to paint the villains as fellow human beings.

It might be stretching a metaphor to compare Britain's "finest hour" with the Battle of Auckland Airport, but the image of dastardly dogfights taking place over New Zealand's main gateway is hard to resist.

Dubai might not have featured in World War II, but to listen to Winston Peters you would think he was Winston Churchill defending the free world against the evil business Nazis. And if anyone is to be the dashing squadron leader Skipper, played by Robert Shaw, it would have to be dashing merchant banker Lloyd Morrison - who even bears a faint resemblance to the late movie star.

Airport chairman John Maasland as Air Marshal Hugh Dowding, anyone? Dowding was played by Laurence Olivier, who apparently did a brilliant job capturing his brooding pessimism and lack of bravado.

The 1969 movie even featured a Canadian, played by Christopher Plummer, who, of course, was on our side.

All very amusing, but to listen to those in the Auckland Airport war room, the battle for the hearts and minds of Kiwis has so far been more hapless than heroic. At stake is a vital $3.7 billion asset which, they insist, is far more important to our economy than some people seem to realise.

While you could be forgiven for thinking the airport is just a giant shopping mall that charges cars and planes a fortune for parking, it is crucial to tourism. And tourism is still one of our most lucrative industries.

Ever since the National/New Zealand First coalition Government decided to float just over half the airport company in 1998, it has proved a spectacular earner - as you would expect from a monopoly. Investors who paid $1.80 a share at the time of the float have seen their investment increase by nearly 1000 per cent on a total return basis.

If you eliminate the recent hike in its share price, due to takeover talk, it is perhaps surprising that it has taken so long for potential raiders to set off on their reconnaissance missions. But given that it is widely regarded as a well-run company with limited room for improvement, maybe it is not so odd that private equity players and infrastructure investors have been focussed on even juicier assets in recent years.

Nevertheless, the airport's board realised about 18 months ago that it might be a good idea to seek a new investor, as it looked to take on more debt. According to Maasland, it has talked to around 10 different parties, but so far Dubai Aerospace Enterprise (DAE) and the Canadian Pension Plan Investment Board (CPPIB) have been the only ones to proceed to due diligence.

Interestingly, New Zealand-based infrastructure investor Infratil was one of those invited to talk to the company. But the board was so unimpressed at the deal offered by Infratil managing director Lloyd Morrison that it ruled out further negotiations.

It was a rather different story when DAE came along. Flush with cash from a booming economy and determined to carve out a future for itself post-hydrocarbons, Dubai is investing billions in becoming a serious player in the aerospace industry. It was already familiar with Auckland through its national airline's sponsorship of Team New Zealand in the America's Cup, and strengthening its ties in the Pacific fitted nicely into its plans.

DAE had hoped to secretly tie up the deal and announce it as a fait accompli. One of the emirate's leading businessmen, Sultan Ahmed Bin Sulayem, had recently been in the country as a guest of Investment New Zealand and was encouraged by the reception he got from officials. New Zealand, he was assured, did not share the US Government's protectionist concerns over investment in key infrastructure assets.

But far from being feted, the Arabs were shot out of the sky. When Trade Minister Phil Goff gleefully admitted at the launch of a local government election campaign that he sympathised with public concern over the deal, DAE was so stunned that it summoned its hired gun, Danish airport executive Kjeld Binger, from his honeymoon in Mexico to find out what on earth was going on.

That Goff's comments came shortly after a major review of Investment New Zealand that despaired at our record of attracting foreign direct investment was an irony lost on no one. But there was little Binger could do. DAE decided they weren't going to hang around if they weren't welcome, and promptly flew off in search of friendlier skies.

DAE had talked about turning Auckland into a much more important hub than it is now and suggested we could be a significant contributor to its aeronautical ambitions, including supplying our know-how to other international airports and using Dubai's aerospace university to enhance our own training and skills.

While Air New Zealand was understandably concerned about how the deal might benefit Dubai's national airline, Emirates, especially given its own toxic relationship with Auckland Airport, those involved in the DAE deal insist it was not some kind of Trojan horse. Some observers are incredulous that Air New Zealand could not see the benefits of getting alongside Emirates, even courting it as a potential cornerstone shareholder.

"Commercially, if they want to be paranoid they can be, but if you think about New Zealand tourism as a whole from a nationalistic perspective you've got to say 'we're bigger than any one company'," says one person close to the deal, who - like almost everyone involved - would speak only on condition of anonymity.

While the same person acknowledges that DAE's timing was poor, they remain angry at the way the Government handled the issue. While Labour was somewhat distracted at the time, trying to retain its influence over Auckland's councils, it still sent some very mixed signals. "There is no foreign ownership restriction on infrastructure assets and if they want there to be one they should put one in, but the de facto [situation] that ordinary Mums and Dads get stiffed when someone wants to buy an asset isn't cricket, in my view."

The board is believed to have made its feelings known at the highest Government level.

Maasland admits to being frustrated at the constant refrain that all foreign ownership is bad because of what happened to Telecom and Tranz Rail. Auckland International Airport, he insists, is different: "The shareholders have done extremely well, and so has the Government because it's got full tax paid. Dubai did bring the opportunity to grow tourism and develop it as a hub, and increase route development. I suspect Emirates would have enhanced the growth of the airport and it wouldn't have damaged Air New Zealand at all."

While the board unanimously endorsed the DAE deal, it added a rider that it was only happy with it in the absence of a better offer. And as it happened, another offer was forthcoming pretty quickly.

Like DAE, the Canada Pension Fund already knew a bit about New Zealand. Our own NZ Super Fund, also known as the Cullen Fund, is in many ways modelled on it. The Canadians are at the stage that Michael Cullen hopes New Zealand will be at at some point in the future: they have accumulated billions in retirement savings and are always looking for reliable investments that also have reasonable long-term growth prospects.

The Canadians are understood to have approached both the Accident Compensation Corporation and the NZ Super Fund about joining it in a consortium. In the latter case, they were told they had to talk to Infratil, which manages the fund's infrastructure investments. After detailed discussions with the Canadians about their plans, Morrison declined to enter a confidentiality agreement with them.

According to those who have dealt with the Canadians, they are extremely sensitive to ethical issues, and determined to play the game as straight as possible. As they see it, they have tried hard to appease both councils and are mystified by why the board did not accept their initial offer, given its similarity to DAE's proposal. One of the issues the board has raised, for example, is that the company's credit rating would drop to only just above investment grade. But this was also true for the Dubai offer, they note.

What appears to have concerned the board is that, unlike a takeover, an amalgamation proposal - which is what the Canadians initially offered - requires it to endorse the deal. It would also have meant paying compensation to the Canadians if it ultimately fell over.

The board appears to have had reservations about the Canadians' strategic links, and to have been unsure whether the Manukau City Council might veto the deal. It wasn't prepared to take that risk.

There is also speculation some board members were feeling the political heat.

While the public has fretted over the issue of foreign investment, behind the scenes it is tax issues that have prompted the most angst. Everyone is wary of discussing the t-word, for fear of encouraging Inland Revenue to investigate further, but it is a major issue for two of the airport's key shareholders: the Auckland and Manukau city councils, who between them control just under a quarter of the company.

Because councils don't pay tax, the imputation credits on their airport dividends are of little benefit, leading new Auckland mayor John Banks to wonder aloud why the council is bothering with the investment at all, given that it is getting an annual payout of just 2 to 3 per cent.

Both DAE and the Canadians have offered a restructuring plan that involves taking on more debt and issuing what are known are stapled securities, which are basically shares with an IOU attached. This enables the holder to get both the interest payment on the debt, which is pre-tax, as well as the dividend, which is post-tax. In other words, the councils would be able to roughly double the cash they get out of the airport, without having to sell any shares. For councils facing revolts over relentless rate rises, that kind of money - understood to be tens of millions - would be handy indeed.

In its bid to get Manukau on side, the Canadians are believed to have prepared an analysis of forecast revenues that show the council would not have to increase rates for five years because of the additional cash it would get.

The proposal would also benefit overseas shareholders. However, not everyone is enamoured with this idea. One problem is that the exact value of the stapled securities would not be known until after the deal was done. There is another catch. According to the airport's lawyers, Russell McVeagh, and the Canadian's lawyers, Bell Gully, the only way the tax benefits can be realised is if the new owner takes at least a 40 per cent stake.

While Auckland City, which is being advised by PricewaterhouseCoopers, is understandably keen to hear more detail, Manukau has thrown a spanner in the works by insisting any new shareholder limit their stake to no more than 35 per cent.

The Canadians have noted that their fund's rules will only allow them 30 per cent of seats on the board. But to further complicate matters, there is also some dispute over exactly how the process will work - if at all.

The Canadians insist they have four legal opinions that there will not be a problem. But Infratil has let it be known that its tax advice is different.

"If Lloyd's wrong, he doesn't care if he's wrong because he's in the box seat," notes a rival. "If he's elected on to the board and if he refuses to sign a prospectus, then he can stop any other amalgamation from occurring."

Airport director Tony Frankham says he rejected the original Canadian proposal because he did not believe it was fair to all shareholders.

"The proposal is very complex. It is a financial arrangement to deliver a financial benefit to some but not all shareholders, and it gives a different treatment to the city councils than it does to the other shareholders. It produces a balance sheet with negative equity, and it means the company was going to report losses after interest for the foreseeable future. It's very hard to go off and endorse a proposal where everyone else has to sell some of their shares but Auckland and Manukau don't have to sell off theirs."

Directors supported the Dubai proposal because they believed the benefits to tourism outweighed such financial disadvantages, he says.

"[DAE] were very keen to enhance routes into and out of New Zealand. They had the connections and influence and power to influence those issues ... The [Canadians] are responsible, competent financial people and although their senior person in the infrastructure division has experience in some airport restructuring, he's not an airport industry man and we're not aware of industry benefits the Canadians bring."

The man in question, Graeme Bevans, is clearly somewhat exasperated at this suggestion. As CPPIB's vice-president of infrastructure, Bevans has 25 years' experience in corporate banking and infrastructure investment and, in his former role as head of Industry Funds Management in Melbourne, managed investments in "virtually every airport in Australia".

Bevans, who is likely to join the board if the Canadian bid is successful, has undertaken to conduct a global search for other experienced directors. He also stresses that he has worked with major airport players such as British operator BAA and Amsterdam's Schiphol. He insists he is more than familiar with how airports work, and how to persuade airlines to diversify their routes to encourage more passenger traffic. He has also worked with giant US private equity firm Texas Pacific, which has been involved in five start-up airlines, including low-cost carrier Tiger Airways: "We will talk to them about developing Tiger Group into and out of Auckland should that be commercially viable."

As for aeronautics, Bevans says he is familiar with large players such as Worldwide Aircraft Services and Terra Firma, an aircraft leasing business. "Dubai, in contrast, is in the process of actually thinking about doing these sorts of things."

He also emphasises that the Canadians are prepared to pay the highest multiple of earnings for any airport company in the world. And that both councils have the chance to offer considerable relief to their ratepayers.

While the board has been lukewarm at best on the Canadian proposal, it has not been a unanimous decision. Mike Smith, who is one of the few directors who does not also have a day job, made a point of recording his support for the Canadian's initial offer.

Smith, who was Douglas Myers' right-hand man for years at Lion Nathan and has also sat on the board of Fonterra, has been one of the main drivers of the sale process and has since announced his resignation from the board. While he has been able to point to the fact he had already indicated he would retire, others believe he has quit out of sheer frustration.

Paul Glass, senior portfolio manager for Brook Asset Management, was impressed by Smith's stand. Such splits are rare on New Zealand boards, yet it is not necessarily a bad thing for directors to take opposing views, he says.

"We commend the directors for making that vote public. It would be good to see more of that in New Zealand."

Glass is critical of how the entire process has so far been handled.

"Everyone now finds themselves in a difficult position where there is only one bidder on the table and they've had to do it in a somewhat hostile manner and bypass the board, which is a little bit disappointing on all counts."

One observer believes the board will rue the day it turned down the Canadian offer. "It's a fascinating story of governance. They're possums in the headlights and they really don't know which way to turn. That's why Mike Smith is saying 'I'm out of here'."

But according to others, some directors are secretly delighted by the partial takeover.

So far, only the board has seen the full Canadian offer. Details of its latest proposal are expected to be made public as soon as today, in time for the airport's annual meeting on Tuesday.

The meeting will certainly be one of the more interesting in a while. Withers is up for re-election and Smith will need to be replaced. Auckland City has nominated Richard Didsbury, Manukau City has nominated John Brabazon, and Morrison is also standing. Glass will only say he believes the voting is "too close to call".

If the Canadians succeed in their bid, the board could change again within a few months. But most eyes are on Morrison.

While Manukau claims to be motivated solely by the views of its residents, who do not want an overseas owner taking control of the airport - which is, after all, on their patch - almost everyone associated with the airport company detects echoes of Morrison in its statements so far.

They believe he has convinced Manukau to reject all offers currently on the table, so Infratil can buy the shares for itself. Nothing wrong with that, they say, provided it is prepared to pay a similar premium to the overseas bidders. The problem, they claim, is that he is not - and is playing a clever game that has already seen his own company, and the NZ Super Fund, picking up $300 million of shares at a price considerably lower than what the Canadians and Arabs have already offered.

By accident or design, Morrison has so far in his career been linked with at least three patriotic causes: redesigning our national flag, and opposing two mergers - Air New Zealand-Qantas, and the Australian and New Zealand stock exchanges. He is something of a media darling, and has plenty of fans.

While some give him credit for his skills and energy in dealing with local government, others see nothing more than an opportunist. Behind the charming patter is a man of steel, say his rivals, who is a worthy heir to corporate raider Sir Ron Brierley.

No one underrates him, but the sceptics remain somewhat surprised that he has been able to avoid being seen as entirely self-interested.

"He has a high degree of interest in seeing no one from overseas succeeding, and the upshot of nobody internationally succeeding is a very much lower share price which enables him and the NZ Super Fund to buy the shares at much lower prices," says one rival. "So they get what is a world-class asset worth millions of dollars to an international buyer at bottom New Zealand prices because he's been successful at scaring the bejesus out of Manukau, and getting Goff and everyone else to sing in behind him."

Some point to the recent comments by Infratil executive Tim Brown about its investment in TrustPower, as an indication of what it is really up to with Auckland Airport. Brown, they note, boasted that Infratil had been happy to wait more than a decade to accumulate its 50.5 per cent stake in TrustPower.

Yet others doubt that Morrison could find the cash to boost his stake in Auckland Airport much further. It is more likely, they claim, that he will seek out another investor who he will probably persuade to join a consortium, possibly along with the NZ Super Fund.

"It's all very well for Lloyd to say the current deal is no good, but he doesn't have the money to invest, and he chooses not to invest at the price that Canada wants to pay," says one sceptic. "He sits there saying there's other buyers out there but I don't think he has any idea who's going to buy it. More to the point, I don't think he cares because in the short term if this thing gets turned over, he is the kingmaker."

His critics are quick to note that his airport investments so far have been limited to small second-tier airports that have not performed particularly well. And they also point to what they believe are serious conflicts of interest, such as Infratil's ownership of Wellington Airport, and its years of work trying to persuade the Government to develop a second airport at Whenuapai.

Morrison recently dismissed the Whenuapai proposal as "just an idea", but as one critic notes: "It seemed like a pretty bloody big idea until the [North Shore] council changed its mind".

The same person struggles to comprehend how he could sit on a board of a company he would clearly like to take over.

Morrison is sanguine in the face of such criticism. "Anybody who has run any successful business in New Zealand is going to have conflicts," he responds. "The question is whether they are material enough or not properly dealt with that they might impact on other opportunities."

As for Whenuapai, Infratil is still keen for it to compete with AIA "but it's no more than a hope at the moment, is it?" he says. And as for the perception that he is against foreign investment, he dismisses the idea as "complete twaddle".

"What we're interested in is New Zealand succeeding and we've made it patently clear we think there is another opportunity for a cornerstone shareholder, and it will be a foreign one. It's just we think it should be limited to a minority interest."

While no one else is particularly optimistic about another bidder stepping forward, given that the infrastructure investment community is a small one worldwide, Morrison insists it's still a possibility, and denies that he is after the company for himself. "That's not true; not at all. We'd like a significant player there to bring it about. While it could be a financial player, we'd rather an operational player who brings something to the business other than just money."

Unlike some, he believes the airport's board has acted with integrity and done its best. "But what hasn't been clear is what their objectives are - whether they are selling control or whether they are bringing in someone strategically and I think that confusion has destroyed a reasonable part of the value in terms of the outcomes, and I think it has deterred the interest of some parties who may have been put off."

Unlike the Battle of Britain, we don't yet know how the Battle of Auckland Airport ends. It's possible that, rather than Robert Shaw, Morrison could yet turn out to be the Michael Caine character in Hamilton's movie who, despite being "hot box office", was shot down. But perhaps he is really ace German fighter pilot Adolf Galland, who famously flew with an image of Mickey Mouse on his plane's fuselage.

According to Galland, the Battle of Britain wasn't a battle, and nobody lost it. It was, he claimed, a sensible attempt to bring England to the bargaining table and when it failed for technical reasons, the bombing attacks were dropped and other means were tried.

Auckland might seem a long way from Europe in 1940. But one thing everyone in this dogfight agrees with is that regardless of who wins the current battle, the war may be far from over yet.

Brokers' ratings raise a question: How independent are the analysts?

The battle for control of Auckland International Airport has revived debate about the independence of analysts who work for broking firms.

ABN Amro Craigs' recommendation that investors not sell their shares to the Canada Pension Fund - despite the fact that it has not yet seen the details - has not exactly come as a surprise to some of the firm's rivals, who note that Infratil recently appointed the firm to handle its rights issue. However, they were surprised to see the firm so publicly backing Infratil managing director Lloyd Morrison's bid for a seat on the airport board.

The Canadians are offering $3.65555 a share for a 40 per cent stake in the airport company. In a research note to investors, ABN Amro Craigs analyst Cameron Watson suggests the stock is worth $3.80 a share.

Watson is not the firm's usual analyst for Infratil. And while the research note does disclose the Infratil connection, an email sent to ABN Amro Craigs clients this week makes no mention of it. The email "strongly urges" clients to vote for Morrison, because of his "proven track record of adding significant value to infrastructure companies", and notes "the vote will be tight".

ABN Amro Craigs is based in Tauranga, where Infratil's major investment, power company TrustPower, is also based. ABN Amro Craigs was involved in the sale of Alliant Energy's 24 per cent stake in TrustPower to Infratil last year. The deal included finding a buyer for Alliant's 5 per cent holding in Infratil.

Watson's calculations are very different to most other analysts, and despite the firm's insistence that it operates "Chinese walls" between its research and investment banking divisions, rivals say it is a remarkable coincidence that its conclusions seem to mirror Morrison's views.

They also claim that ABN Amro's head of research, James Millar, has recently been seen around the traps with Infratil executives, helping to push its case.

Watson has admitted that backing Morrison's bid to get on the board is highly unusual for an analyst. "It's a rare step for us to go this far. But it's a pretty rare asset," he told the Business Herald this week.

Two broking firms, First NZ Capital and Credit Suisse, have acted as financial advisers to AIA. Deutsche Bank acted for the Dubai group and UBS is advising the Canadians.

Of the others, Citigroup has a "hold" rating for AIA. On the face of it, it says, the cash offer looks "highly attractive", given that its target price is $2.70, without factoring in any M&A activity.

Goldman Sachs JB Were has recommended shareholders sell the stock. It describes the Canadian offer as "a positive development for AIA shareholders... increasing the likelihood that shareholders can receive a strategic premium for a proportion of their holdings". It also notes that the Canadians' offer values the airport on a historical basis at 21 times its earnings before interest, tax, depreciation and amortisation (EBITDA). This compares favourably to previous sales of minority stakes in major airports which have traded at between 10 times and 16 times EBITDA, it says. Even majority stakes in major airports have traded at an average multiple of 17 times EBITDA.

Macquarie has a neutral rating and a target price of $2.85, and suggests that at face value, the Canadians' offer price is a good one. "It suggests a historic EV/EBITDA multiple of 21.3x, more than appropriate for a minority stake."

Opening New Zealand's doors to the world

* 1928: Auckland Aero Club set up at Mangere on rented land.

* 1930: Auckland City Council shortlists three airport sites: Point England in Tamaki; Massey Park Estate, Papakura; and Mangere.

* 1936: Jean Batten lands at Mangere, ending her record 11-day, 45-min solo flight from England.

* 1937: Mangere becomes Auckland's official airport.

* 1945: City council decides to move official airport to Whenuapai.

* 1948: Review finds Whenuapai unable to meet international aviation standards.

* 1955: Government announces Mangere will be site for future Auckland International Airport.

* 1965: After five years' construction, first commercial jet service flies into Auckland International Airport on July 20 - an Air NZ DC8 on its delivery flight from the US. Official operations begin in November.

* 1966: Auckland International Airport officially opens. Construction has cost £10 million. In its first year, new airport handles 750,000 passenger movements, 22,000 aircraft movements and 8300 tonnes of freight.

* 1988: Management shifts from local government to the new Auckland International Airport Ltd (AIAL).

* 1998: Government sells its 51.6 per cent share in AIAL through public float. Company listed on Stock Exchange with 67,000 shareholders.

* 1999: North Shore City sells its 7 per cent shareholding to Singapore's Changi Airport.

* 2004: Airport breaks 10 million passenger mark (for the 12-month period ended January), then in November 11 million passengers.

* July 2007: Dubai Aerospace's takeover bid revealed. Airport directors unanimously recommend deal under which Dubai would buy 51 per cent to 60 per cent of the airport company.

* August 2007: Dubai Aerospace abandons bid.

Source: Auckland International Airport, Herald files