AIR - Air NZ.

CJ · 03-09-2013, 08:54 AM

Originally Posted by bulltrap

Good point, I make it 43.4% to be exact. It'd basically take their entire cash reserve.

If they could buy the shares and not cancel them, that'd only cost half. But is a company allowed to eat its own tail like that?

A company can own a maximum 5% of its own shares as treasury stock.

**bulltrap** · 04-09-2013, 03:51 AM

Originally Posted by CJ

Also gives the benefit of any discount required to existing shareholders which is a lot fairer than with an institutional bookbuild which is more likely.

Regarding that book build, John Key was quoted as saying retail investors would get a grab:

http://www.stuff.co.nz/auckland/loca...ir-NZ-sale-Key

Key said there would be an opportunity for retail investors to buy shares, however it would be short. He did not elaborate on how it would work.

Seems to me it's likely to go through the brokers. They only need to raise $300-something million in total, should be a doddle, and it's already listed so no-one can complain about missing out.

I'm thinking now might be a good time to strike up a relationship with a meatspace broker, as I doubt DirectBroking will be giving me a call. Although truth be told I may be maxed out on this one already.

**modandm** · 04-09-2013, 06:18 AM

Hi bulltrap,

I know it does sound optimistic, but AIR could certainly buy back some of the government stake, and certainly over a period of 2 or 3 years. 43% might be a bit tough agreed, but given they operating cash flow of 700m last year and will do 800-900 this year they have the cash - if only management were a bit more aggressive. Remember they are spending 1.8bn on planes over 3 years, that's more than their entire market cap!

As said earlier even with this capex they expect gearing to be middle of target range. In my view considering the scale it would be appropriate for gearing to rise to the top of the range and then come down. AND the forecast they have used to provide this probably uses quite conservative numbers I would suggest.

In my view there is a compelling argument for large scale share repurchases - for god sake stop spending on VAH and look after your own shareholders! If they had spent $300m on Air NZ shares instead of VAH shares, earnings and dividends per share could be as much as 25% higher which would be bloody fantastic.

**modandm** · 04-09-2013, 06:24 AM

Originally Posted by CJ

A company can own a maximum 5% of its own shares as treasury stock.

yes but you buy and then cancel. This is common practice around the world - especially in the US where managers are better incentivised to maximise shareholder value.

CJ · 04-09-2013, 06:57 AM

Originally Posted by modandm

yes but you buy and then cancel. This is common practice around the world - especially in the US where managers are better incentivised to maximise shareholder value.

yes. That was in response to a question that if they didn't cancel, they would only have to buy back ~25%, not ~45%

**modandm** · 04-09-2013, 09:24 AM

Originally Posted by CJ

yes. That was in response to a question that if they didn't cancel, they would only have to buy back ~25%, not ~45%

Sure - thanks for doing those numbers. I guess the other thing about is dividends. Would AIR be better to just pay large special dividends instead? This way imputation credits would be utilised.

Personally because I think the shares are significantly undervalued I would prefer the buy-back. Also, despite imputation credits buy-backs would be slightly more tax efficient. The market tends to view a buy back as more temporary as well while dividends tend to be considered sticky putting more pressure on management.

I need to do some work modelling out the P&L and balance sheet to try and understand the impact of this capex. I never really thought I would want to hold onto the shares for that long, my thinking has been to sell around this time next year. BUT if the numbers still stack up - this could be a multi-year story... and multi year risk...

Speaking to management soon, the AGM will be the next catalyst.

mod

CJ · 04-09-2013, 09:51 AM

Originally Posted by modandm

Sure - thanks for doing those numbers. I guess the other thing about is dividends. Would AIR be better to just pay large special dividends instead? This way imputation credits would be utilised.

A lot of their profit would be earned overseas so they dont have a large IC balance - per the last accounts, they only have $41m so not enough to pay a large special dividend (probably only enough for this years dividend). Something for you to model??

A buyback could be a good option?

**bulltrap** · 04-09-2013, 02:07 PM

Originally Posted by modandm

I know it does sound optimistic, but AIR could certainly buy back some of the government stake, and certainly over a period of 2 or 3 years. 43% might be a bit tough agreed, but given they operating cash flow of 700m last year and will do 800-900 this year they have the cash - if only management were a bit more aggressive. Remember they are spending 1.8bn on planes over 3 years, that's more than their entire market cap!

As a shareholder I like the sound of this, and shareholder opinions should be paramount. Especially those of their controlling shareholder, the NZ Government.

If AIR was to buy back and cancel some significant portion of the government overhang, there wouldn't need to be a sweetener discount, and the value of the remaining overhang would go up along with the share price. Then they proceed to place the remainder. They have fewer shares to place, so no need for a fire sale.

Net result: more money for the government. Other shareholders are also stoked with the share price increase. As for the company itself, well they'd basically be investing in themselves, and (in shareholder's opinion, at least) that's a good investment.

And yes, since they're the government, they can give AIR financing terms that would make Harvey Norman blush.

OTOH, if getting higher sales proceeds is the main aim, they could surely still get more if they sold a controlling stake to a single buyer. That should be underlying value plus a takeover premium. But given what they've already said publicly about the sale, it'd be deceitful to take this path now. They'd have to go ahead with selling the overhang (not doing that would also be deceitful, even if it's what voters favour!) and wait until after the next election to sell the rest.

Regarding treasury stock, AIR holds about 1% currently so could acquire up to another 4% (either from govt or buy resuming on-market share repurchase). However, treasury stock apparently have no voting rights, so holding treasury stock is essentially the same as temporarily cancelling the shares. I wouldn't be surprised if the market values them a bit differently though.