The case for Auckland International Airport upping its stake in Queenstown Airport is “not compelling”, an independent report concludes.
The damning report by consultancy PricewaterhouseCoopers – made public today (Wednesday) – sounds alarm bells over Auckland boosting its existing 24.99 per cent shareholding.
Auckland controversially snapped up its stake in Queenstown Airport last year for $27.7 million – leaving majority owner Queenstown Lakes District Council with 75.01 per cent.
Both airports’ bosses recently ditched an option for Auckland to further increase its stake to up to 35 per cent – although haven’t ruled out revisiting it in the future.
A section of the PricewaterhouseCoopers report examining the “fairness to council” of this potential second stage buy-in weighs up the cash benefits versus loss of total control.
It concludes the case for selling further shares is not compelling if:
– council doesn’t need the cash
– Queenstown Airport can finance development in other ways
– and the strategic alliance agreement as it stands works effectively for both Queenstown and Auckland airports.
“The considerable premium incorporated into the price that [Auckland] will pay will be insufficient to compensate the council for the loss of value it will suffer if its shareholding is reduced below 75 per cent,” the report says.
“So in the absence of a need for cash and a strong strategic reason for allowing its shareholding and its extensive control of the company to be reduced, the rational for giving the company approval to exercise the option is not clear.”
The same section of the report outlines the “consequences” of council ownership falling below 75 per cent.
“[Council] will no longer have control of the constitution, be able to pass special resolutions and pass ordinary resolutions without a meeting of shareholders.
“Moving below 75 per cent will diminish the control the council can exercise over the company,” the report says.
It adds: “The council will have a commercially-focussed fellow shareholder that will have a degree of negative control i.e. the ability to block any special resolutions or actions that require a 75 per cent majority.”
Because council would still have more than half the company, it would still be able to control the composition of the board and pass ordinary resolutions.
Further, upping Auckland’s stake would mean entering a shareholder’s agreement with Auckland International Airport, which has signalled it would require:
– Board representation
– Council commitment to work towards the growth target in the “Strategic Alliance Agreement
– Appropriate minority shareholder protections
– Inclusion with council in making material governance decisions
– A commercially appropriate dividend policy
– In the event of a material default by council or Auckland, the right for the other party to acquire the defaulting party’s shares at fair value.
On the flipside, an increase in Auckland’s stake would result in the Queenstown Airport Corporation getting cash of between $11 million and $21 million, the report says.
The company has said it doesn’t require the money to fund “business-as-usual operating and capital expenditure for the foreseeable future”.
“However it expects to use some of the cash to finance the development of land in its land bank,” it says.
The report adds that cash not required by QAC would be available for shareholders, which could see a substantial amount made available to council.
Council chief executive Debra Lawson says simply put, the report found the issue of further shares would have come down to “cash versus a loss of control”.
“The community could have received a sizable portion – around $10 million – as a dividend. On the other hand if council ownership fell below 75% it would no longer have control of the constitution,” Lawson says.
On the initial 24.99 per cent purchase – which remains the subject of reviews lodged in the High Court – Lawson says PWC’s report gives “some comfort” regarding the price paid.
Queenstown Airport has welcomed the release of the PWC report, saying the analysis “clearly supports the commerciality of the sale”.
“The report reinforces the decisions taken by the QAC board and clearly states that the deal was a good one for the principal shareholder, QLDC,” chairman Mark Taylor says.
“The report also acknowledges the value of the strategic alliance and the benefits that Auckland Airpoirt can generate to support Queenstown Airport to manage and grow its business.”
The initial purchase, done in secret without the knowledge of councillors or the community, sparked the formation of a high-powered lobby of local businessmen – the Queenstown Community Strategic Assets Group - which has joined Air New Zealand in lodging the High Court action.