Brian Fallow: Government off the rails with bailout

You know you are in trouble when Michael Cullen starts sounding like Tony Gibbs.

The Finance Minister and the GPG boss are both out to - forgive the expression - railroad shareholders into deals that flout the central principle of the Takeovers Code.

The difference is that one is in the corporate raiding business, the other belongs to the Government that introduced the code.

Consider the similarities between Tranz Rail and Tower. Both are former state businesses (NZ Rail and Government Life) brought by their private-sector boards and management to the point where they urgently need copious transfusions of capital.

In both cases the directors are recommending recapitalisation schemes that will give the providers of the new money a controlling minority stake - 35 per cent in the case of the Government and Tranz Rail; at least 30 per cent for GPG and Tower.

In both cases the new shares are to be issued at a discount to the earlier market price. Both boards insist time was running out and this was the best deal they could get.

In both cases shareholders will have to vote to waive the protection of the takeovers code, which is precisely designed to prevent control passing to someone not prepared to acquire an outright majority of the shares, and in ways which exclude small shareholders from sharing in any premium for control.

In Tranz Rail's case, the result is an odious contrast between what the Government says when making the rules of the game and what it does when it wants to play on its own account.

Asked how he squared these two positions, all Cullen could say was: "The Government has a public policy interest in this, which is rather different from any private interest."

Its reasoning seems to be that the legacy of a decade of underinvestment in the network has to be repaired in the national interest.

This means accepting a less-than-commercial return on the renationalised track, but if there is to be any upside from this subsidy, the Government should be on that side of the deal as well.

Hence the fateful - not to say daft - decision to bail out Tranz Rail, a company that had benefited, the Government says, from an extremely soft privatisation and subsequently ran the business into the ground.

That is if you can call it a bailout, when it seems to be another sale-and-leaseback arrangement of the kind that brought Tranz Rail to its knees.