O'Sullivan: Market rises from the dead

By FRAN O'SULLIVAN

If events of the past fortnight prove one thing it is that dead ducks can fly.

Come on, own up. We've all beaten the crap out of the New Zealand Stock Exchange for years - the sharemarket's parlous liquidity, the exchange's clubbish ownership structure, its failure to even bring off a marriage deal with the Australian Stock Exchange, not to mention the parade of watchpoodles which passes for a market surveillance panel.

Cocktail party chatter in Auckland and Wellington is full of such matters.

But the chat takes second place to the excitement presented by two high-profile takeover plays, the battles for control of Fletcher Energy and the Montana Group.

Amid all the claims and counter-claims produced from the plethora of investor relations advisers, PR flacks and high-priced litigators involved - not to mention the full-page advertisements advising shareholders how to cast their votes - one aspect stands out.

That is the realisation that the New Zealand market now represents some bargains for international heavyweights and the Australian or New Zealand mid-weights, which see plenty of upside in capturing ownership of our quality listed companies.

Shareholders in Fletcher Energy and the Montana Group have seen the value of their stakes escalate as rival bidders push share prices well above prevailing market rates.

In the Montana play, Lion Nathan has trumped Allied's bid of $4.40 a share by offering $4.65 a share.

But Allied has hinted it may yet offer an even higher price, if Lion is forced to sell its stake following the deliberations of a special market committee.

Shell has been forced to raise its bid price for Fletcher Energy to $US3.55 a share by the rival Peak Petroleum consortium, which in turn had to raise its own price to $US3.85 a share to stay in the game as a viable alternative to be considered at tomorrow's special meeting of Fletcher shareholders.

This is good news for both the New Zealand shareholders and the employees of the two companies under offer, as the bidders all want to foster the growth potential each company represents.

There are a range of other companies where a control play may occur, Carter Holt Harvey, Tranz Rail and Brierley Investments among them.

In this environment, New Zealand investors would do well to look for local opportunities of their own, instead of mindlessly repeating the mantra that the Wild West New Zealand market will not be a place for small investors until a takeover code is introduced.

The New Zealand Stock Exchange was snubbed by the Australian Stock Exchange (ASX) last week.

The ASX may have sung to Prime Minister John Howard's songsheet as it brutishly rejected the NZSE merger in favour of an outright takeover.

But as with Mr Howard's strategy to cut New Zealand out of a joint initiative to form a free trade agreement with the United States, it makes sense to look for the opportunities the crisis presents, rather than slavishly adopting a pessimistic approach.

New Zealand has other options to boost its capital markets. But they require the Government to adopt a pragmatic approach rather than relying on the simplistic dogma which it used to attract voters at the last election.

First, the Government can ensure its own asset portfolio is used to boost New Zealand's capital markets.

The Coalition still owns a raft of state assets which could be partly privatised to add extra depth to the New Zealand market. Among them are companies such as Transpower, Airways Corporation, Television New Zealand and NZ Post.

Each of these would be attractive to sharemarket investors, and through listing on the Stock Exchange would be subject to much more rigorous - and public - monitoring than the Crown Company Monitoring and Advisory Unit can provide.

Note here the emphasis on partial privatisation - not outright sale.

Taking such a step would once again flag New Zealand's presence in international equity markets - where it has basically disappeared - yet enable the Government to assure its support base that it still has ultimate control of any partly privatised companies.

Even the ace privateer from Labour's last term in government, former State Owned Enterprises Minister Richard Prebble, now admits that his Government should have adopted a popular capitalism approach to selling shares in Crown-owned companies, rather than trade sales.

Now leader of Act New Zealand, Mr Prebble advocates such a strategy for boosting the New Zealand market and introducing more New Zealanders to private investment.

Second, the Coalition can change New Zealanders' attitude to risk through its development of venture capital funds.

The widely foreshadowed appointment of Yigal Erlich, the founder of Israel's venture capital industry, as a Government adviser on the development of a homegrown VC industry is the first important step.

Mr Erlich's success story in developing the Yozma Funds - which began as Government-driven funds before their ultimate privatisation - is well known. Yozma's two funds now have investments totalling more than $US170 million ($395 million) in 40 portfolio companies.

But the key to Yozma's success is the relationships the Israeli Government forged with the private sector.

In New Zealand the formation of a Crown Seed Capital Fund (CSCF) is the first step along the Government's path to boosting start-up and development capital by investing $10 million seed stakes in a range of investment funds. The Government will ultimately exit the funds and sell down its own seed stakes to private players after three years.

This initiative owes much to the foresight of the New Zealand-Israel Trade Association, which sponsored Mr Erlich to visit New Zealand late last year and has taken opinion-formers to Israel.

Not spelled out yet is the potential for backdoor privatising of the crown research institutes. A welter of publicly financed scientific research is wasted through the failure to commercialise CRI developments. Some of those will be spun out as the CSFC starts.

Through these moves, taxpayers finally stand to get a return on their investment.

It is yet another step on the path New Zealand must take to obtain first-world status.