DAVID KNIBB SEATTLE
Moves by Singapore Airlines to seek a bigger stake in Air New Zealand appear to have scuttled a Qantas plan to buy into the flag carrier
A Qantas Airways bid for Air New Zealand (ANZ) that would have turned Australasian aviation on its head has been thwarted for now by Singapore Airlines (SIA), but the financial issues that prompted it remain unresolved.
If the New Zealand Government agrees, ANZ will survive in its present form with Ansett remaining its subsidiary. Under SIA's proposal, which ANZ's directors have endorsed, SIA will increase its 25% shareholding in ANZ by an unspecified amount up to 49% and will assist ANZ with a fund-raising effort crucial to an upgrade of Ansett's fleet.
In contrast, the Qantas bid was to buy up to 49% of ANZ, joining the two rivals in what Geoff Dixon, Qantas chief executive, called a "partnership". Meanwhile, SIA would have disposed of most or all of its shares in ANZ and bought all of Ansett from ANZ.
Under the SIA bid, ANZ remains a Qantas rival, Ansett remains an ANZ subsidiary, and SIA will be a bigger ANZ shareholder.
This plan still faces two significant hurdles. First is the New Zealand law that caps ANZ's foreign ownership. As it currently stands, no foreign airline may own more than 25%, no combination of foreign airlines may own more than 35%, and total foreign ownership may not exceed 49%.ÊAustralia imposes parallel caps on Qantas.
Foreign ownership cap
New Zealand Prime Minister Helen Clark is publicly sceptical about raising these caps. Interestingly, the New Zealand media and other public officials seemed more hostile to the Qantas bid than to the prospect of SIA raising its stake. Australia is viewed by many in New Zealand as a rival, Singapore as a more benign investor.
Wellington's willingness to allow SIA a bigger stake depends on how critical the government concludes this is to ANZ's rescue from its current capital dilemma. This, in turn, poses the second significant hurdle for SIA - how much financially can it really help ANZ?
Gary Toomey, ANZ's chief executive, is quick to point out that his airline faces no cash shortage - it has NZ$1 billion ($470 million) in the bank. But Toomey also concedes, and all analysts agree, that ANZ's debt-equity ratio poses a formidable problem in financing the NZ$4-5 billion fleet renewal that subsidiary Ansett sorely needs. Part of this handicap is the NZ$640 million price ANZ agreed last year to pay for Ansett. Since then, ANZ has become a captive parent to its money-losing subsidiary. Ansett, whose problems have been bigger than anyone foresaw, will lose an estimated NZ$300 million for the year that ended 30 June.
ANZ's dilemma has been the unwillingness of its shareholders to provide an essential capital injection. The main holdout has been Brierley Investment, which held a majority of ANZ's shares before SIA bought its 25% last year. Brierley still holds 30%.
Rather than inject capital into ANZ, Brierley wants out. Many observers suspect it was behind the Qantas bid, which was quietly suggested to Qantas by a Singapore-based merchant banker, as a way for Brierley to exit ANZ.ÊSIA has disclaimed any role in that initiative.
For months ANZ's capital crunch and Brierley's attitude have fuelled speculation within Australia that ANZ would sell part or all of Ansett to SIA. That would certainly raise cash, but Toomey never liked the idea. "ANZ's purchase of Ansett was a very important acquisition because it gave ANZ a scale it could not otherwise achieve. We just have to make Ansett work," he insists.
ANZ's board now agrees with Toomey. In announcing its approval of SIA's plan to buy more ANZ shares, the board affirmed that, "the existing structure, which includes 100% ownership of Ansett Australia, is the most desirable for the long-term success of the company."
The number of shares that SIA buys is up to the New Zealand Government. The price is already set and the shares will be a new issue. Later this year ANZ also plans to proceed with a rights issue, and SIA says it will participate. Analysts estimate that the combined effect of SIA's share and rights purchases could be a NZ$900 million boost in ANZ's capital. That is still short of what ANZ needs, but it could restore some confidence in ANZ's balance sheet.
Brierley is resigned to a dilution of its own stake. If SIA's investments also boost ANZ's share price, however, it could still escape with few wounds.
The challenge now is for ANZ to convince Wellington that this is the only scenario that will allow it to remain a major player. If it succeeds, rest assured that Qantas will turn up the volume on its own demands, that Canberra will also change its foreign ownership caps, and the globalisation of Australasian aviation will continue apace.
Source: Airline Business
