KEY POINTS:
Based on early indications, in particular the proposed sale of Telecom's Yellow Pages and Woolworths' interest in The Warehouse, the year ahead will be another step in the steady takeover of New Zealand's businesses by Australian interests.
This capitulation to Australians in the business arena is bizarre given our unwillingness to give them an inch in sporting, political or other fields.
It is also strange in light of the strong support for Warren Buffett's buy and hold investment philosophy by several New Zealand investors.
Australian investments in New Zealand have increased from $32.4 billion to $68.7 billion in the five years ended March 31, 2006. Meanwhile our investments in Australia have grown from $20.5 billion to $25.0 billion over the same period.
As a result our investment deficit with Australia has soared from $11.9 billion to $43.7 billion since March 2001.
Australian investments now represent 29.3 per cent of New Zealand's total inward foreign investment compared with 18.8 per cent five years ago.
Our second largest investor is the United States, which represents 17.8 per cent of investment compared with 15.4 per cent in March 2001.
The impact of Australian investment on New Zealand is illustrated by the fact that it is equal to 99.9 per cent of the total market value of all domestic companies listed on the NZX as at March 31, 2006 whereas our investments across the Tasman represented just 1.8 per cent of the ASX's total market capitalisation on the same day.
The other notable feature of Australian/New Zealand investment trends is that the former are more aggressive as far as direct investment is concerned (companies buying 10 per cent or more of another company). Since March 2001 Australia's direct investment has grown from 55.4 per cent of its total outlay in New Zealand to 57.4 per cent in March last year.
Over the same five-year period all of the increase in New Zealand involvement across the Tasman has been in the form of portfolio investment as our direct investments in Australia, in dollar terms, have been totally static.
The March 2006 figures, which showed a $12.7 billion rise in Australian investments in New Zealand, demonstrated that the takeover of New Zealand businesses by our near-neighbour is accelerating.
The acquisitions approved in the year to March 2006 included several retirement villages, wine companies and commercial properties and Trade Me, NZ Dairy Foods, Evergreen Forests' assets, Capital Properties, Tegel Foods and Strategic Investment Group.
This year has started in a similar vein with Australian newspapers speculating that the Yellow Pages would be purchased by Kerry Stokes' Seven Media, Fairfax Media or Telstra. In addition, Woolworths has applied to the Commerce Commission to acquire 100 per cent of The Warehouse.
The combined purchase price of these assets is expected to be between $4 billion and $5 billion and would give Australian interests control of two more iconic New Zealand businesses.
In November last year Telecom announced it would launch a competitive sale process for its Yellow Pages Group because it "would be in the best interests of the Telecom Group and its shareholders in the longer term".
The sale was not fully explained and is difficult to understand for a number of reasons including:
* Group executives are constantly talking about developing Telecom's broadband multimedia activities yet it is selling a major asset that could help its development in this area. Why doesn't Telecom maintain a controlling interest in Yellow Pages and form a joint venture with a multimedia organisation that would help it develop its activities in this area?
* As chief executive Teresa Gattung is expected to step down this year why didn't the board wait for her replacement to have an input into the future of Yellow Pages? Fairfax CEO David Kirk has been mentioned as a possible replacement for Gattung but he would want to develop Yellow Pages' internet potential rather than sell it.
* Most New Zealand assets are sold far too cheaply because they under-perform under domestic management. Why hasn't the Telecom board tried to find a CEO who could develop the full potential of Yellow Pages?
Essentially Yellow Pages is a media asset and most of our sales in this sector have been substantially below current values.
For example:
* Wilson & Horton was valued at $1.1 billion when it was fully acquired in 1998. These assets, which are owned by APN News & Media, are now worth well in excess of this after taking into account capital restructurings and tax benefits.
* TVNZ sold its 9.4 per cent interest in Sky TV for $94 million in mid-1999. These shares are now worth in excess of $250 million after taking into account capital repayments.
* INL's publishing assets were sold to Fairfax for $1.2 billion in 2003 and are now worth in excess of $2 billion.
* Through several clever deals, News Corporation acquired effective control of Sky Network Television for a fraction of its current value. News Corp's 43.6 per cent stake is now worth in excess of $1.1 billion.
* Telecom sold its 47 million Sky TV shares (12 per cent holding) into the 2003 INL $4.79 a share takeover though the independent report said the offer was unfair and Sky's independent directors recommended a rejection. The bid was unsuccessful as only 235,315 other shares accepted the offer.
As far as The Warehouse is concerned Stephen Tindall has done an excellent job if his aim was to flush out potential buyers for his 50 per cent-plus stake. Foodstuffs entered the fray first and was followed by Woolworths.
The Warehouse's share price has risen sharply but investors should be careful they don't sell out too cheaply as a successful takeover by Woolworths would give the Australian group a powerful position in New Zealand as it already operates Progressive (Foodtown and Countdown) and Woolworths supermarkets.
Progressive was sold by New Zealand investors for $558 million in 1999 and is now worth approximately $2 billion.
International investment flows are an acceptable and positive feature of the modern world but there are four main problems with transtasman investment trends as far as New Zealand is concerned.
These are:
* The flows are one-sided with Australia almost completely dominating New Zealand, particularly as far as direct investment is concerned.
* Australians are mainly buying long-established and profitable businesses whereas new greenfield investments would be far more beneficial to the NZ economy.
* New Zealand directors have a poor concept of long-term value and most of our assets have been sold well below current values.
* These asset sales are making a large contribution to the country's current account deficit because of the subsequent dividend outflows.
Shareholders should be telling the Telecom board and all other directors to refrain from selling long-established and profitable assets until they have exhausted all avenues for extracting full value from these operations.
How many investors truly believe that this goal has been achieved with either Yellow Pages or The Warehouse?
