Here is similar analysis from the Herald.
NZ Herald
Gaynor: Rare glimpse into a corporate crisis
13.04.2002
By BRIAN GAYNOR
The 126 documents that the Government released on Air New Zealand are a treasure chest of fascinating information.
They offer a rare insight into behind-the-scenes negotiations during a big corporate crisis.
The documents will be important material for case studies by business students. They will give future business leaders the clear message that it is extremely important to carefully plan and execute a major purchase and have sufficient equity to reduce the risks associated with it.
The first document, a letter from chief executive Gary Toomey to Prime Minister Helen Clark on March 19 last year, set the tone for the rest of the material released this week.
Toomey's core message was that Air New Zealand had to purchase Ansett "in order to survive and develop internationally", but was hopelessly undercapitalised as a result.
He pointed out that Air New Zealand had a much higher debt ratio than Qantas and needed to attract large sums of additional capital, estimated at upwards of $9 billion, over the next seven years.
Toomey wrote that "$2.5 to $4 billion will need to be in the form of equity". Because 51 per cent of the capital was in A shares, and only New Zealanders could hold these, $1.3 billion to $2 billion would have to be raised from New Zealand investors.
Toomey suggested that the single kiwi share should be turned into 780 million kiwi shares, representing 51 per cent of the capital. The A and B shares would then be merged, representing 49 per cent of capital, and all these new shares could be traded without restriction.
The Ministry of Transport called this proposal a sham and advised its minister that it had offered the same opinion when Brierley Investments chief executive put forward a similar proposal a year earlier.
A Treasury report disclosed that the average age of Ansett's fleet was 13.8 years, compared with an industry average of 9.7 years, and that the maintenance and upgrading of these aircraft would cost an estimated $8 billion to $12 billion.
The report pointed out that Air New Zealand's $285 million rights issue in 2000 was 20 per cent under-subscribed, and that it would be difficult to raise more equity because of the sharp deterioration in the airline's financial performance.
Consultants Cameron & Company told the Government that only two equity raisings in New Zealand had achieved in excess of $400 million, and no more than $150 million had been contributed by New Zealand investors.
Cameron concluded that the small size of the New Zealand sharemarket, and the requirement that New Zealanders must own 51 per cent of Air New Zealand, severely limited the airline's capital raising options.
But the blockbuster letter, the one that best summed up Air New Zealand's problems, was written by BIL chairman Sir Selwyn Cushing to Helen Clark on June 27.
Sir Selwyn's letter contained a position paper approved by the BIL board. BIL's directors fully supported the acquisition of Ansett and were opposed to any suggestion that it should be sold.
The document said that BIL was an investment company with a basic objective "to achieve an annual return of 20 per cent on its shareholders equity".
"Air New Zealand has consistently destroyed shareholder value in recent years by failing to achieve returns in excess of its weighted cost of capital," says the document.
" None of the proposals put forward by Salomon Smith Barney [an external adviser to Air New Zealand] which entail further capital injections into Air New Zealand would provide a return on that additional capital in excess of BIL's weighted cost of capital.
"Accordingly any further capital put into Air New Zealand by BIL would be likely to destroy shareholder value at BIL."
How could Sir Selwyn and BIL promote and support the Ansett acquisition but refuse to invest any more money in Air New Zealand because the purchase would not generate an acceptable financial return?
Many reports were produced over the next four weeks, but by the end of July the Government and its advisers still had no idea of the extent of Air New Zealand's problems.
On July 23, the Treasury reported that the airline would lose $360 million for the year to last June (the actual loss was $1425 million), and two days later PA Consulting Group, one of the Government's external advisers, argued that Air New Zealand must maintain control of Ansett.
PA believed that the Ansett acquisition was the right move but was highly critical of Sir Selwyn and his management team.
The consultants reported that there had been minimal schedule co-ordination between Air New Zealand and Ansett, little restructuring of the Australian airline, few examples of joint purchasing and the cost reduction targets had not been achieved.
They concluded: "In short, previous management lost its focus, and the lack of management information has and will hamper efforts by the new management team. [headed by Gary Toomey]".
The Memorandum for Cabinet, dated July 27, indicated that Air New Zealand needed to raise equity of $850 million and there were two realistic options:
* A recapitalisation of the airline that would include the merger of the A and B shares and a rights issue. After completion, Singapore Airlines would own 35 per cent and the Crown 10 per cent.
* The sale of Ansett to Singapore Airlines. Qantas would acquire the Asian carrier's 25 per cent stake in Air New Zealand.
Developments moved quickly during August as Ansett's financial position deteriorated.
On August 3, Air New Zealand chairman Jim Farmer wrote to Finance Minister Michael Cullen advising him of the perilous situation.
Ten days later a letter with a similar message, signed by all Air New Zealand directors, was sent to Cullen.
None of the documents received from Air New Zealand and released this week contained any specific information on the airline's financial position.
Investors were also unaware of the severity of the company's problems, as its A shares traded between $1.08 and $1.17 during the first 15 days of August.
Towards the end of the month, Singapore Airlines began to get cold feet. On August 24, chief executive C.K. Cheong told Rob Cameron of Cameron and Company that after studying updated information from Air New Zealand, Singapore was unlikely to contribute to the recapitalisation.
Over the next three weeks many different solutions were discussed among the Government, Air New Zealand, Singapore Airlines, Qantas and BIL. But Ansett's problems were terminal and Singapore Airlines and Qantas both walked away.
The rest is history. Ansett collapsed on September 12 and the next day Air New Zealand announced a loss of $1425 million for the June year and an $885 million Government bailout.
When business students study the huge amount of material released this week they will come to several important conclusions.
First, the initial six months after an acquisition is the most important period and it is critical to have a strong management team in place from the start. Air New Zealand had a weak management team, under acting chief executive Sir Selwyn Cushing, and did not achieve any of its acquisition targets.
Second, no matter how good an acquisition it will not be successful if it is mainly paid for by debt, particularly in the high-risk airline industry. One of Air New Zealand's big failures was that it did not have sufficient equity when it acquired Ansett.
Finally, the New Zealand sharemarket is far too small to finance our companies when they make major overseas acquisitions. Unless there is a substantial increase in the willingness of individuals to invest in the sharemarket, our companies will continue to struggle overseas.
* Disclosure of interest: none
*
[email protected]
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For my part, both analyses seem to hit the mark. Importantly, they make the points that the situation was dynamic and that the Board and Pollies were playing catchup; nevertheless, right until the last, the situation was recoverable if the pollies had acted for the best, rather than for their own agenda.
I also wanted to note that prime cause for this whole godawful mess cannot rest with:
a. the fat man and his Aussie imports, who were sold the hospital pass of the century;
b. the AN maintenance fiasco, although it delivered the
coup de grace;
c. frontline personnel of either airline, even taking into account some of the aggro we kiwis got at the time; or
d. the cost structure of AN, which should only have been an issue to be addressed as the group evolved.
Rather blame must be laid at the feet of political expediency on both sides of the ditch, beginning with the privatisation of AirNZ, the 89 strike, the lack of parity of implementation of CER on either side of the Tasman, through to the decidedly kiwi-only flavour of the 'rescue'.
If it's worth anything, my own feeling is that the rescue has done irreparable harm to the reputations of AirNZ and NZ in general. Moreover, I have the feeling that AirNZ
as a group should have been let go, with the best elements able then to survive and prosper as a group. The rescue has saved AirNZ's name, but that's all: no reputation, no customer base, no avenue in which to develop; it's a rescue in name only and a phyrric one at that.
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Selwyn Cushing: j'accuse
John Anderson: j'accuse
Helen Clark: j'accuse