Tranz Rail surprises analysts

By DANIEL RIORDAN transport writer

Tranz Rail's move to take a 50 per cent stake in the joint venture that will run its Tranz Scenic operations has surprised some in the investment community, given the company's commitment to quitting passenger operations.

The rail company on Friday sealed the sale of its long-distance passenger business to Don Gibson and Gary McDonald, the principals of Australia's West Coast Railway (WCR), for $33 million.

Mr Gibson and Mr McDonald will become equal partners with Tranz Rail in a new company which will take over Tranz Scenic's operations this month. Each partner will contribute $5 million to the new company. The remaining $23 million will be financed by the ASB Bank.

The joint venture will manage and operate five Tranz Scenic routes and will own all of Tranz Rail's long-distance passenger rolling stock.

Tranz Rail will have board representation but no active management role.

Tranz Rail spokesman Alan McDonald said the company had never put a figure on the share it would take of the joint venture.

He said it took as much as it did because it saw the financial benefit it would bring.

However, investment analysts said they were surprised Tranz Rail took such a large stake, given that it was quitting passenger operations in favour of freight.

Mr Gibson said France-based rail operator Connex was interested in the deal but pulled out after it took a significant direct stake in WCR.

"The gap left had to be filled up - I think Tranz Rail would rather have less than it got."

Mr Gibson said WCR would look to build on Tranz Scenic's existing success and develop new routes.

CS First Boston analyst Andrew Mortimer said he was surprised at the level of equity retained by Tranz Rail. He had expected a minority position.

He said the price of $33 million ($28 million of which goes to Tranz Rail) was close to expectations and he was waiting to hear more details on track access arrangements. Mr Mortimer valued the shares at $4.39.

Another analyst with a leading broking house, who asked not to be named, said he was also surprised at the size of Tranz Rail's stake.

The sale price was slightly above his expectations and he valued the shares at $4.50.

Tranz Rail shares closed 5c higher yesterday at $4.15.