The following is an article about the sale of Auckland airport - the near miss. The next few posts will be articles directly from Watchdog - again - Happy Reading - and if you would like to join CAFCA and receive your own Watchdog please visit http://www.cafca.org.nz/
GOVERNMENT VETOES TAKEOVER OF AUCKLAND AIRPORT
A Tale Of High Adventure And Limpets
- Quentin Findlay
In Watchdog 116 (December 2007, “Airport 07: Two Transnational Corporate Takeovers That Didn’t Take Off”, http://www.converge.org.nz/watchdog/16/01.htm) I commented on the events that had occurred up to November 2007 in relation to the proposed sale of Auckland International Airport (AIA). The saga of the airport has been one of the most engaging and ongoing in recent times. It started with attempts in early and mid 2007 by two different international companies to buy significant shares in it; it has been the subject of anguished meetings of two city councils, Parliamentary speeches have been made on it, large newspaper advertisements have been placed supporting or opposing the share buyout and, latterly, it was the cause of late night changes to the Overseas Investment Act by the Cabinet as a means of intervening in the deal.
Initially, the Airport was wooed by Dubai Aerospace who proposed a 59% share buyout, which would have seen majority shareholding owned by a consortium of Dubai companies, including the Government of Dubai. When that deal collapsed, the Airport was approached by the Canadian Pension Plan Investment Board (CPPIB) who proposed a 49% buyout. This level was later progressively reduced. Government (and wider political) opinion in relation to the deals were not favourable, with Government Ministers openly decrying firstly the Dubai and later the Canadian arrangements. Into the fray also came Auckland and Manukau City Councils, which own shares in the Airport, as well as Wellington-based investment firm Infratil, which also administers the New Zealand Super Fund and also holds shares.
The opposition to the deal and the amount of alienation felt by Infratil and the councils from the decision making process was so marked that they proposed their own directors for election to the Airport Board which was held on November 20th. At a packed and noisy meeting at which the outgoing Board was roundly questioned and criticised by shareholders for their decisions regarding Dubai and the CPPIB, a new Board was elected.
However, the CPPIB had no intention of either going quietly or even noisily like Dubai Aerospace and presented new stock options to the Board and to AIA shareholders. The CPPIB deal was a 40% buyout of stock at 365 cents a share, as well as the issue of stapled securities*.The resulting upheaval about whether to accept or reject the new deal split voting shareholders and the newly elected Board. However, under the Takeover Code for such a deal to proceed it required the approval of a majority of shareholders who vote. If approval was not gained then the deal could not proceed, regardless of the number of shares offered for sale. * A stapled security is security that is contractually bound to one or more other securities to form a single saleable unit. For example a unit of shares in a company can be bound to unit of a trust and they must be purchased and sold together – Wikipedia.
Direct Advertising To Shareholders
Battle was thus joined. Shareholders had until March 13th 2008 to accept or reject the deal. While the Board was in favour of rejecting the bid, the CPPIB was proving to be exceptionally tenacious in its desire to have the deal approved. As a consequence the CPPIB went over the heads of the AIA Board and directly to the shareholders in terms of its offer. On December 18th, the Board went public with its rejection of the CPPIB bid by authorising large newspaper advertisements with the headline, “It’s Your Airport, Let’s Keep It That Way!” Several days later, on December 22nd, the Canadians responded to the Board with their own large full page advertisements offering: “The facts about our partial offer”.
Despite political disquiet, the Government remained largely mute about the offer. However, this situation changed in late February 08 when the first putative actions were taken with the Minister of Finance, Michael Cullen, firing the proverbial shot across the Canadians’ bows by advocating the removal of stapled securities as a means of receiving excessive interest donations against taxes. Effectively this eliminated CPPIB’s appeal to shareholders, such as the Auckland City Council, which would have received tax advantages. Cullen’s move as a spoiler also worked on another level with the share price of AIA failing from 283 cents to 245 cents in the immediate aftermath. But the changes to tax regulations did not affect the principal bid for the Airport, even if they did have the effect of neutralising the financial advantages for some of its more significant shareholders.
Government Changes The Rules, Sky Has Not Fallen Despite Predictions
So, in early March, the Government finally made its decisive move on the matter with the Cabinet approving new changes to the Regulations to the 2005 Overseas Investment Act. Under an Order in Council the new Regulations allow the appropriate Ministers to block the sale of any overseas land or assets if the investment runs counter to the need to maintain New Zealand control of strategically important infrastructure or sensitive land. The new regulations give the Government the power to directly intervene in the sale process by becoming the final arbiter of the process. Like the ancient emperors of Rome, the Government would decide as to whether the deal lived or died.
The disapprobation of the business community and its allies in the financial pages of the papers, some of whom broke into apoplectic fits, was swift in coming. Predictably, most condemned the move as unnecessary interference in the business process, with a few muttering that Sir Robert Muldoon had been reincarnated. The financial analyst for the New Zealand Herald, Brian Gaynor, was one of the more polite commentators in condemning the move. Writing what amounted to a follow up to another article he had written about the sale in December 07, Gaynor more or less continued his lament on the “fickleness” of the politicians. He noted that it was the fourth Labour Government which had started the sale process in the 1980s with its’ corporatisation of the airport, before he wondered aloud as to the reasons why Labour was now in the process of halting that same process. He expressed his concern as to how these moves would affect investment.
Bruce Sheppard of the Shareholders Association was more forthright in his opposition to the Government’s moves. In his column for the Herald, he positively frothed at the mouth over the Government’s intervention in the sale process. In a short but pointed article he expressed his indignation, accusing the Government of robbing New Zealanders, of undermining business investment and of being short sighted. Regarding the Government’s new restrictions on foreign ownership, he huffed that: “As far as the New Zealand control issue is concerned the horse bolted years ago. Auckland Airport is already 40% foreign owned”.
Leaving aside the 24 year time difference between the free market and free wheeling Fourth Labour Government and its post-New Right predecessor, the simple reason for the new restrictions lies in democratic expediency. The facts are that the majority of the population opposed the corporatisation and the later, 1998, sale of the Airport (under National, with Winston Peters as Treasurer; by means of a share float) and of public assets generally. However, their wishes were ignored by the ideologically driven politicians who proceeded to sell those assets off to business interests. In the intervening two decades between 1984 and 2008, assets such as Auckland Airport were progressively removed from public and community control and placed into the hands of shareholders and members of the business community. The public never acquiesced to having their control removed, they were simply powerless to prevent such a plunder from occurring. However, that situation changed in the 1990s as Governments ceased to be whole entities and became coalitions of various parties. MMP allowed political and economic power to slip away from the business community and its allies.
In such a context the actions of the Greens, New Zealand First and, latterly, Labour are completely explainable, being merely reflections of a strong and popular public desire to halt and even reverse the asset sale programme. Auckland Airport has merely become the latest flashpoint in this battle. Simply put, people didn’t want asset sales and in some cases they want them back. While Sheppard is lamenting the “tens (sic) of thousands of New Zealanders that can’t have their money,” as a result of the Government’s actions, he conveniently ignores the fact that hundreds of thousands of New Zealanders used to have a share in assets through public ownership, only to have that control and ownership whisked away. It would appear that the concept of theft is in the eye of the beholder.
However, Bruce Sheppard’s apoplexy was not shared by other members of the Establishment. In a remarkably balanced and reasoned editorial, the Christchurch Press gave its critical support to the Government’s moves, while asking some pointed and significant questions. “Widespread unease about the overseas buy up of New Zealand is palpable,” the Press editorial writer commented. “[It was this unease which] … has been reflected in a progressive tightening of regulations”. Confronting the bogey of investment loss, the Press noted that the new regulations would not halt foreign investment in the country as New Zealand still had one of the most open investment regimes in the world. A more recent Press editorial (“Bad for NZ”, 14/4/08), after the Government vetoed the deal and after this article was written, was back into much more typical Press mode, accusing the Government of “looking for an easy, mindless vote-winner” and of raising a “populist fuss… that is a very handy device to have in an election year”. So, normal service has resumed. Ed.
The Press (in its first editorial on the subject) also wondered aloud about the Government’s motives behind the new legislation. Whereas some commentators had hinted at a deeper ideological motive in relation to the Government’s moves, the Press instead noted, that the Government appeared to be regulating “on the trot” and its attitudes to foreign ownership remained “unclear”. This lack of clarity exhibits itself clearly in the Government’s keen desire to sign up to free trade deals with China and the US.
It would be fair to say instead that the Government has reacted to public unease over the issue. It has shown no desire to prohibit foreign investment as demonstrated by its commitment to free trade and the resulting deduction/elimination in tariffs and economic and financial controls. The Government’s actions are not those of a party that is committed to socialism rather they are based on the political doctrine of populism. As the Press noted a Government convinced of public ownership would not have waited for eight years to make its move in terms of limiting or halting foreign private ownership or investment.
What Constitutes A Strategic Asset & What Constitutes Control?
There is also the additional issue of what constitutes a strategic asset. In terms of the Government’s newly announced priorities the Airport has now been listed as “strategically important infrastructure”. Yet, when the Airport was first sold in 1998 by the National/New Zealand First government, it was not worthy of that status. Its lack of strategic importance at that time was noted by no less a luminary than the then Treasurer, Winston Peters. Now Peters is opposed to the Airport sale and has attempted to fudge his own support of privatisation a decade ago by claiming that the majority of the Airport’s shares were sold to New Zealand interests at the time of sale. Such claims do not inspire confidence in New Zealand First’s future commitment to public ownership. It also demonstrates the rather elastic definition by politicians as to what is and what is not a strategic asset.
The other issue which was thrown up as a response to the Government’s change to overseas ownership was that of what constitutes control. In this situation it was control of the Board of Directors. Originally, the CPPIB had proposed a 49% share in the Airport which would have netted it complete control in terms of directors and voting. This was reduced to 40%, which was still significant in terms of voting blocs. It was the 40% option that was proposed to AIA shareholders for their consideration. However, after the Government announced that such an option was unacceptable and that the deal would now need the approval of the Minister of Land Information, David Parker, and the Associate Minister of Finance, Clayton Cosgrove, CPPIB announced that it would voluntarily limit its voting rights to 24.9% as a means of tempering the Government’s actions.
As a means of justification CPPIB claimed that this move was a reflection of its commitment to the “very clear transparency of [its] intentions”. While it might be maintained that the CPPIB move was “noble”, and a number of commentators have claimed this, it does need to be remembered that these moves are reactive. The CPPIB decision to reduce voting rights came after the Government’s decision to impose new restrictions. No such noble intentions were abundantly clear before the Government’s moves. In its first bid, 49% of the shares would have netted the Canadians an effective majority shareholding due to the dispersed share register. Even the 40% bid would have allowed the Canadians a comprehensive and unified voting bloc.
The changes to voting rights by the Canadians and the Government reaction did have the effect of splitting the Board and some of the principal shareholders. Infratil, which had been widely expected to reject the bid, changed sides as a result of CPPIB’s decision to limit its voting rights. Infratil now offered the Canadians its support and its 3.3% shareholding. In another twist the AIA Board which had originally rejected the offer did a U turn and recommended that shareholders should sell their shares into the $3.59 per share offer. Explaining its new position, Board Chairperson, Tony Frankham, commented that: “We all agree that shareholders would be unwise not to realise part of their holding at the favourable partial offer price if the partial offer receives approval to proceed”. The Board however remained split on whether shareholders should vote in favour of CPPIB acquiring up to 40% of AIA.
Takeover Vetoed, In Spite Of OIO Advice
The Government, it appeared suffered from no such confusion. On April 11th, both Parker and Cosgrove reported to the country that they had decided to reject the deal as it did not offer substantial benefits to New Zealand. Their decision was against the advice of the Overseas Investment Office (OIO) which had recommended the sale as being beneficial. Explaining the decision later, Michael Cullen, said that: “AIA is a strategic asset and a monopoly provider, so there had to be good reasons why the proposal should be approved”. Cullen also spent time pouring cold water on the National Party’s recent policy announcement of retaining 51% public or New Zealand ownership in strategic assets by noting that such policy was a breach of New Zealand’s obligations under the World Trade Organisation/General Agreement on Tariffs and Trade. Such agreements, Cullen claimed, had specified that rules had to ensure individual decision making.
From National’s perspective the worst election campaign it could face was one in which privatisation and ownership of strategic assets became centre stage. Considering public opinion on the matter it has decided to flip flop by, firstly, backing away from its original policy announcement of selling off assets but retaining 51% ownership to now committing a future National-led Government not to sell State assets at all during its first term. This of course leaves the door open for public sell offs in the second term of a National-led Government.
However, despite backing away from the issue of asset sales, National was quick to line up with its business allies in claiming that the halting of the CPPIB bid would have dire effects on business investment in New Zealand. However, such claims are rather disingenuous when one considers that the Government has recently signed a free trade deal (with China) and has reopened up another which would further substantially weaken the rules around foreign investment (the P4 plus the US. See Bill Rosenberg’s article elsewhere in this issue. Ed.) As the Press noted, and has been widely reported elsewhere, New Zealand has one of the most business friendly economies in the world. A recent Survey of Economic Freedom, from the US Heritage Foundation and the Wall Street Journal listed New Zealand as number six just after the United States at number five. The Foundation noted that: “A globally competitive financial system based on market principles attracts many foreign banks, helped by low inflation and low tariff rates. A strong rule of law protects property rights…”.
It appears that some within the business community are so convinced of their ideological status that any opposition in what ever form is a threat. Despite the fact that New Zealand’s regulations on investment are amongst the weakest in the Western world, the very fact that a Government had halted a foreign takeover on purely populist motives has been enough to spook them. New Zealand economically remains a very long way from the regulations imposed on business and investment in Europe and even further from the policies that might be required for the implementation of a socialist nirvana. As pleasing as it is to see the Government pursue the public rather than private interest, this decision does not constitute the thin edge of the economic wedge.
Equally, the Canadians have proven to be tenacious in pursuit of their goal of having shares in the company. Like limpets on a rock or barnacles on the side of a ship they were determined to remain fast and as a result it took a lot of effort to dislodge them, if, indeed, they have been dislodged. Part of the reason for this approach might lie in the future plans of the CPPIB. The Canadians, like Dubai Aerospace, saw the Auckland deal as the first steps toward management of other international airports. In an article in the Press, reporter Andrew Janes noted that the CPPIB intended to make bids for two other airports – Prague and Chicago Medway. Graeme Bevans, CPPIB Head of Infrastructure, noted that if the CPPIB bid was successful then there would be “… an opportunity to use the [Auckland] airport management expertise through management contracts worth several million dollars a year, at other airports the CPPIB might buy”.
Government Should Resume Its Stake In AIA
The halting of the deal does not mean that the matter will simply disappear. The Government’s decision remains open to judicial review and several key players in this deal have hinted that they are considering this option (although the CPPIB has stated that it will not. Ed.). Further the Government’s actions are being challenged by the New Right through Parliamentary avenues by Roger Kerr, who remains the head of the neo-liberal Business Roundtable and the Wellington Regional Chamber of Commerce Chair, Charles Finny. Both Kerr and Finny have written to Parliament’s Regulations Review Committee, which is chaired by National MP Richard Worth, to protest the Order in Council.
Lastly, the AIA Board has stated that even if the Canadian offer did not proceed, it would still continue to seek a suitable cornerstone shareholder to take a smaller stake in the company. While the CPPIB was wooing the Airport it was locked in negotiations with a secret bidder. While these talks failed, the Board remains determined to find a suitable partner. If the Government is serious in protecting strategic assets then it should consider being that cornerstone or maybe even dominant partner.
Stuff, 12/4/08, “National would have sold slice of airport”, NZ Press Association.
New Zealand Herald, 11/4/08, “Govt says 'no' to Auckland airport bid”.
New Zealand Herald, 8/4/08, “Airport Takeover Papers Shrouded in Secrecy”, Paula Oliver.
New Zealand Herald, 5/4/08, “Shareholders Hope for Rational Decision”, Brian Gaynor.
New Zealand Herald, 19/3/08, “Call for Probe into Govt Rule Change”, Fran O’Sullivan.
New Zealand Herald 12/3/08, “National Decides Airport Issue is worth Debating After All”, Paula Oliver.
New Zealand Herald, 12/3/08, “Canadian Bid Given Shot in the Arm”, Grant Bradley.
New Zealand Herald, 11/3/08, “Clark Quiet on Fund’s New Ploy for Airport”, Audrey Young.
New Zealand Herald, 11/3/08, “Manukau City Council Won’t Sell Airport Shares”.
New Zealand Herald, 11/3/08, “CPP Fires Shot at Government over Voting”, Grant Bradley.
Press, 12/3/08, “Infratil Accepts Bid”, Andrew Janes.
Press, 11/3/08, “New Twist in Battle for Ownership”, Roeland van der Bergh.
Press, 9/4/08, “What’s In it for Us?”, New Zealand First advertisement.
Press, 6/3/08, “Shareholders have until April 12 to Learn Fate of Partial Bid”, Andrew Janes.
Stuff, 5/3/08, “Nats would Not Ban Airport Sale”, NZPA.
Press, 5/3/08, “Bumpy Landing”, Editorial.
Stuff Blogs, 4/3/08, “Another Asset Theft”, Stirring the Pot, Bruce Sheppard.
Stuff, 4/3/08, “Canadians Continue with Airport Bid”, NZPA.
Press, 4/3/08, “Airport Sale looks Doomed after Law Change”, NZPA.
Press, 27/2/08, “AIA’s Shares Fall after Law Change”, Andrew Janes.
Press, 26/2/08, “Split over Canadian Offer”, Andrew Janes.
Stuff, 25/2/08, “Board Says Sell Airport Shares to Canadians”, NZPA.
New Zealand Herald, 25/2/08, “Directors Recommend Canadian Bid for Airport”, NZPA.
Press, 18/2/08, “Airport Expertise Key”, Andrew Janes.
Press, 6/2/08, “Talks with Suitor Break Up”, Andrew Janes.
Press, 5/2/08, “Deadline for Mystery Airport Bidder”, Andrew Janes.
New Zealand Herald, 16/1/08, “Survey Ranks NZ in Top Six for Economic Freedom”.
Press, 22/12/07, “The Facts About Our Partial Offer”, CPPIB advertisement.
Press, 18/12/07, “It’s Your Airport – Let’s Keep it That Way!”, AIA Board advertisement.