Contrasting asset sale dividend claims

Greg Presland did some “back of the envelope calculations” on dividends on assets part owned by the Crown in Imagine if National had not sold the shares in our companies 2015 version.

About 12 months ago I wrote this post on the loss of dividends that would otherwise have been paid to the Crown because of National’s privatisation activity.  I calculated the country had lost $360.7 million in dividends although there had been a saving in interest.  And the country had also missed out on $485 million in the increase of the value of the shares.

I did another back of the envelope calculation today based on the latest company announcements.  I am afraid that things are way worse.  It looks like we lost $471 million in dividends not to mention further capital gains in the value of the shares we sold.

My calculations may be wrong.  Back of the envelope calculations while watching Auckland v Canterbury even using Excel are not optimal.  And I have not tried to understand any changes in capital structure and what consequences they may have had.  But I think that the New Zealand nation has been royally rogered by the sale of the power company and Air New Zealand shares.

I repeated the calculations and the figures this year are worse.  Far worse …

The results are:

  • Meridian paid a total dividend of 18.23c a share compared to last year’s result of 13.01c per share.  If the shares had not been sold the dividends that would be paid to the Government would total $229 million this year not to mention $163.4 million last year.
  • Mighty River Power’s profit went down but it still paid a dividend of 19c a share.  Dividend loss to us, $128 million and last year $91.2 million.
  • Genesis Energy increased its dividend payout to 16c per share compared to last year’s payout of 13c per share.  Dividend loss to us last year was $61.9 million and this year is $78 million.
  • Air New Zealand had a bumper year and announced a total dividend of 16c per share.  The value of the shares National sold increased by $186 million and the dividend loss this year was $35 million.

My quick calculation is that since their sale the shares the Government sold have increased in value by $1.378 billion.  Over the past two years we have lost that in capital increase and $831.7 million in dividends.  We did receive $4.7 billion in sale proceeds although this is before the cost of selling the shares.

Overall in two years we have gained $4.7 billion less expenses but we have lost $1.4 billion in capital gains and $831.7 million in dividends.  That is $2.23 billion or nearly half of the sale amount.

Brian Gaynor looks at some different numbers at NZ Herald in Air NZ privatisation has paid off for taxpayers:

There is a widely held belief that the partial privatisation of state-owned assets is a complete ripoff, that taxpayers are being taken to the cleaners.

This opinion was expressed in a letter to the Weekend Herald following Air New Zealand’s recent profit announcement. The reader wrote: “Just a few years ago, the taxpayer bailed out the airline to the tune of $900 million. Wouldn’t it be lovely to run a company that when you make a profit, management takes credit and if you make a huge loss, the taxpayer bails you out. It is now time to repay its profits to the taxpayer.”

These comments are totally inaccurate, as an analysis of Air New Zealand – as well as Genesis Energy, Meridian Energy and Mighty River Power – illustrates that taxpayers have achieved fantastic returns from the Crown’s shareholdings in a number of NZX-listed companies.

That’s quite a different story. On Air New Zealand:

In September 1996, Air New Zealand acquired 50 per cent of Australia-based Ansett Holdings and in February 2000 it acquired the remaining 50 per cent.

Ansett went bust in September 2001 and Air New Zealand was in serious financial difficulty.

The company reported a loss of $1425 million for the June 2001 year, and in October 2001 the Crown agreed to put $885 million into the ailing carrier. This comprised a $300 million loan, in the form of convertible preference shares, and the purchase of new shares for $585 million. The convertible preference shares were switched into ordinary shares in 2005.

In 2004, Air New Zealand had a rights issue at $1.30 a share and the NZ Government purchased a further $150 million worth of new shares.

What has the Crown received in return for its $1035 million Air NZ investment?

• It has collected total dividends of $765 million.

• It received $365 million for the sale of 221.3 million shares in November 2013 which reduced its shareholding from 73.2 per cent to 53.1 per cent.

Thus, the Crown has received a cash return of $1130 million for its $1035 million investment. In addition, its remaining 582.9 million Air NZ shares were worth $1446 million at Thursday’s closing price of $2.48 a share.

It is inaccurate to claim that taxpayers have been shortchanged by Air New Zealand and its management team when the Crown’s total investment of $1035 million is worth $2576 million. This includes dividends received, the proceeds from shares sold and the value of its remaining shares.

The Air New Zealand investment has had an extremely positive outcome for taxpayers.

And on the more recet part asset sales:

The Air New Zealand investment has had an extremely positive outcome for taxpayers

Another issue is the partial privatisation of Genesis Energy, Meridian Energy and Mighty River Power and whether taxpayers have had a positive outcome from this strategy.

One of the major arguments against the sharemarket listing of these electricity generators was that the Crown would lose 49 per cent of its dividend income if it sold 49 per cent of these companies.

The figures in the accompanying table tell a different story.

The Crown will receive total dividends of $440 million from the three electricity generators for the year to June, when they are all 51 per cent owned by the Government, compared with $485.8 million two years ago when they were all 100 per cent tax-payer-owned.

Thus the Crown has received $4308 million from the partial sale of these companies yet its dividend income has fallen by only $45.8 million. This is a remarkably positive outcome for taxpayers.

The reason for this is that companies usually lift their performance after an IPO, mainly because they are subjected to far more scrutiny. It is somewhat similar to a football team performing much better in front of 50,000 fans compared with at a training run with only a few coaches.

For example, Genesis Energy has gone from one shareholder to more than 55,000 shareholders, Meridian Energy from one to nearly 49,000 and Mighty River Power from one shareholder to in excess of 100,000.

The combination of a large number of outside shareholders, directors and senior management owning shares, and greater scrutiny by these shareholders and the media means that partially privatised companies are likely to perform much better than 100 per cent Crown-controlled entities. As a consequence, they also tend to pay higher, more sustainable dividends.

Gaynor concludes:

It is patently clear that a sharemarket listing and 51 per cent Crown ownership has been a win-win situation for taxpayers and investors in Air New Zealand, as well as the three electricity generators.

That’s quite different to Presland’s back of an envelope claims.

Concern over Genesis sale

The National Government has confirmed plans to proceed with selling up to 49% of Genesis Energy.

I always had concerns about designing an asset sales programme to fit a term, and to sell so much of similar energy stock. Buyers look for diversity, the Genesis sale is more of the same old.

It looks more like a political decision than a sound business decision.

Labour and Greens inflicted damage on the stock selling business with their NZ Power play to score political points – at the country’s cost.

National are playing hard ball and are not backing down from completing their programme (except for the munted Solid Energy).

This puts many millions at risk.

It’s hard to see any party coming out of this with much credit. Political deficit seems more likely.