After Air New Zealand, Tranz Rail

By PAM GRAHAM

Tranz Rail and the Government are in talks but do not yet have a deal on the table.

John Wilson from the Treasury and Chris MacKenzie from Finance Minister Michael Cullen's office met Tranz Rail staff at their invitation in Auckland on Wednesday night.

It was agreed that Tranz Rail would provide more data about its position in the middle of next week.

The Government does not want to prop up private sector businesses or operate a railway system, but its desire to have rail as part of its transport strategy means it is prepared to look for some middle ground.

Because Tranz Rail was sold without a Kiwi share, the state cannot force it to keep uneconomic lines open. In fact, Tranz Rail has kept such lines open - the Gisborne- Napier link, for instance - even when it was criticised by fund managers for failing to sort out a deal with the Government.

The company did have talks with the Government last year at which six broad options were on the agenda for consideration:

* Government ownership of the network and open access to it.

* Government ownership of the network and limited access for other operators.

* Government ownership of the network and sole access for Tranz Rail.

* Tranz Rail ownership of the network with an across-the-board subsidy.

* Tranz Rail ownership with targeted subsidies.

* Doing nothing.

The company's spiral downward in the sharemarket this week amid a five notch downgrade by credit rating company Standard & Poor's on concern about cashflows has dealt a blow to that framework. Tranz Rail has now been asked by the Government to reconsider what assets it is selling amid concern that it could be throwing the baby out with the bathwater in its search for cashflow.

A total Government buyback of the company - which was not previously on the agenda - cannot now be ruled out, but is unlikely.

It is understood the Government feels it could buy the company for between $190 million and $210 million, but it would still have to recapitalise it and bring the network up to scratch. The company looks to require about $160 million of additional capital.

A more likely scenario is an Air New Zealand type deal where the Government injects capital in return for a majority stake in a listed company. It could exit later with the network in its hands.

A third scenario is a buyback of the network, but that would require approval from Tranz Rail shareholders and would not solve management issues.

It has been thought that when a concrete proposal is put on the table a deal could happen in a matter of days. That moment seems to be getting closer.

The company has also been having separate discussions with its bankers. Their views will be critical to whether the company can trade its way out of its problems and what proposal, if any, is put to the Government.

Tranz Rail shares rose 20 per cent to 42c on Thursday after plunging to a record intra-day low of 30c on Wednesday. About 5 per cent of the shares on issue changed hands on Thursday. Brokers said there had been one big institutional seller in the market.