Tranz Rail shares react sharply to bailout news

12.00pm

Shares in Tranz Rail rallied sharply this morning gaining more than 25 per cent to hit 102c in aggressive early trade, a reaction to Friday's announcement of a $226 million Government bailout for the troubled rail operator.

Tranz Rail shares were at 80c just before a trading halt was placed on them in advance of the announcement of the deal mid-afternoon on Friday.

By 10.30am today, 6.4 million Tranz Rail shares had changed hands and the stock had traded down to 93c after racing to $1 shortly after the sharemarket opened.

Forsyth Barr broker David Price said Tranz Rail's sharp gain was driven by new confidence that the company was going to be bailed out.

"It's quite a strong rally on the fact that they're not going to go to the wall," he said.

"There was some aggressive buying on the open which has now disappeared.

"I think you'll probably see it trade back from here," he said.

Mr Price said most of the trading involved retail investors. Institutional investors were likely to hold back until more information on the Government's offer was available.

' 'At this stage I don't know whether enough detail has been released for everyone to be able to form an opinion over and above what we've seen this morning," he said.

The deal announced by Finance Minister Michael Cullen will see the Government pay $76 million for a 35 per cent stake in the company in a rights issue, as well as injecting $44 million immediately to prevent the stricken national rail operator from lurching into insolvency.

The money will help Tranz Rail make an impending lease payment on wagons and locomotives on June 19.

Under the deal, the Government would buy back Tranz Rail's track for the nominal $1 for which it was sold, and pay $50 million for associated assets.

The Government would then lease the track back to Tranz Rail and take on the cost of badly needed overhaul and maintenance for the network, expected to cost a further $100 million over five years.

The rail network would be owned and managed by a new company, but Tranz Rail would have exclusive access.

A "use it or lose it" clause will withdraw Tranz Rail's exclusive access to tracks if freight volumes fall below 60 per cent of current volumes.

The company would have to pay a track access fee of $41.2 million for the first nine months. That figure could rise to $70 million a year.

Paying $76 million for a 35 per cent stake in the company means the Government is effectively offering 67c a share for its stake, well below the 75c per share takeover bid currently on the table from Australian distribution company Toll Holdings.

But analysts say the Government's commitment to take on and upgrade the rail network means the deal is worth a lot more to Tranz Rail than its face value would indicate and could potentially save it $20 million a year.

Taking into account the $50 million purchase of assets and other factors the Government's offer was equivalent to $1 per share ABN Amro Craigs retail advisor Nigel Scott said.

Brook Asset Management's Simon Botherway said this morning the cost of maintaining and upgrading the track was the major cause of Tranz Rail's problems.

"Really the capital expenditure associated with that is too great for the company in its present form," Mr Botherway told National Radio.

The Government's offer effectively provided a subsidy on the track.

"Tranz Rail gets a saving in that their network access charge will be lower than the capital expenditure that the Government is required to invest in the track on an ongoing basis."

A key issue for investors is how long the Government is planning to subsidise the track network.

Dr Cullen said on Friday the Government does not intend to be a long term Tranz Rail shareholder

"There does need to be further clarification of exactly what the underlying deal is, especially over the long term," Mr Botherway said.

The Government's proposed buy-up of new shares would dilute existing share holders' stakes including Toll Holdings' 10.1 per cent.

Mr Botherway said whether shareholders vote to accept the deal when it is put to a vote on April 11 would likely depend on any new offer Toll made in the meantime.

"It appears to us the Government deal is marginally more attractive than the Toll offer, so Toll is going to have to have another look at its deal."

Toll Holdings said on Friday it was not withdrawing its bid.

"It is unusual to be competing with a government," Toll managing director Paul Little said.

"There aren't a lot of guidelines for this sort of thing."

Meanwhile the Rail Freight Action Group which represents major users of the rail network, while cautiously welcoming the deal said it would like to see operators other than Tranz Rail have access to tracks.

Spokesman Cedric Allan said if Tranz Rail was able to adopt a new business model and provide an efficient service, members of his group would be "pretty happy".

"But we don't want to see them installed there for another 60 years as the monopoly service provider with the Government guaranteeing them a return on their capital," he told National Radio.

But editor of Rails magazine Bob Scott told National Radio New Zealand was too small to have competition in the rail sector. Overseas experience showed competition led to rail operators fighting over the best routes, he said.

Commenting on the deal for the first time today, Prime Minister Helen Clark said the Government was driven by the national interest to step in and keep the railways running.

Miss Clark said the country had to have a viable network.

"That's because we carry a lot of heavy freight on rail and we've no appetite for that going on the roads," she said.

"The infrastructure and maintenance costs in that event would be immense, to say nothing of the safety of the rest of us fighting more juggernauts on the road."

Miss Clark, speaking on TV One, said the Government could not see any other solution.

The proposal has drawn a mixed reaction from other political parties.

The Greens strongly support it, but ACT and National consider the Government should not risk taxpayers' money and private investors should have been sought.

- NZPA