Australian rail firm shines light on privatization
5:30 AM Saturday Jul
28, 2012
Photo / Thinkstock
As New Zealand bosses
and workers at state-owned firms, prospective institutional investors and mum
and dad punters get ready for the great asset sell-down, across the Tasman Sea
in Australia rail company QR National is shining a light on the pitfalls and
pay-dirt.
This week Australia's
biggest rail freight operator, QR National, was in court, hammering out the
industrial legacy of its switch from state to private ownership.
The Queensland company
wants to cut more than 500 jobs, adding to 600 shed last year as part of a
top-to-bottom overhaul of operations that chief executive Lance Hockridge said
was needed to rid QR National of an inheritance of bureaucracy and excessive
overheads.
As company negotiators
went back to the table with unions, QR National was locking in new deals
against the background of China's slowing economy, forecasts of an end to the
mining boom, rising costs and domestic uncertainties.
In the past few weeks QR
National has signed a 10-year contract to haul export coal from Cockatoo Coal's
central Queensland mines, agreed to work with Indian-owned Adani Mining on a
new line out of the coal-rich Galilee Basin, and will test the feasibility of
building an independent railway with Atlas Iron in Western Australia.
Another major test lies
ahead: the promised sale of the 34 per cent stake still held by the state
Government some time after QR National announces its 2011-12 results late next
month, a package worth almost A$3 billion ($3.9 billion) and potentially one of
the biggest capital offerings of the year.
While the new state
Liberal National Party Government elected in March has reversed its earlier
opposition to the privatization of QR National, the timing has yet to be
announced.
Premier Campbell Newman
said when he took office that the Government's holding would be sold only when
it could realize the best price. Although still well above IPO levels, QR
National shares have eased from a peak of more than A$3.50 to A$3.14 on
Thursday.
The sale will be used to
help retire state debt of about A$62 billion.
Yet when the former
Labor Government announced its plans to split the state-owned rail carrier into
two divisions, keeping ownership of passenger operations and selling freight as
a separate new company, many investors viewed it as flogging tarnished silver.
And the timing of a
November 2010 float added to forecasts of doom: economic storms were still
lashing the world, memories of Telstra losses scarred the mum-and-dad investors
QR National hoped to attract, the market was suspicious of IPOs, and the
failure of the Myer float circled like an albatross.
Warnings of future debt
scared others. The company was committed to a A$3.75 billion capital building program
and borrowings of A$2.4 billion, which a consortium of big mining companies led
by BHP Billiton and Xstrata claimed would overstretch a privatized QR National.
The consortium's later
A$5.1 billion offer for the company was declined.
Analysts and fund
managers also warned that the terms of the float were unfair to retail
investors, that the company was overvalued, its float was priced on growth
estimates two years out when massive new debt would have been raised, and that
more global turmoil lay ahead.
Billionaire miner Clive
Palmer said he wouldn't touch the stock with a barge pole.
There was also brand
awareness.
While other big IPOs had
national recognition, QR National was almost unknown outside Queensland,
forcing the launch of a A$15 million national marketing campaign.
And, politically, the
knives were out.
Former Premier Anna
Bligh's Government was in terminal decline and her decision to sell QR National
as part of a A$14 billion privatization program to shed debt and regain
Queensland's AAA rating triggered outrage.
The plan was lashed by
the LNP despite its own policies of privatization, unions protested in the
streets, voters abandoned Labor and party members quit in droves.
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But there were powerful
underlying strengths, recognized abroad if not at home.
QR National is the nation's
largest rail freight hauler with about A$12 billion in assets, 2600km of track
and 746 locomotives and, outside Queensland's massive coalfields, carts bulk
haulage in Western Australia and containers down the eastern seaboard.
And while doubts are
emerging about Asian demand, resources will remain a massive powerhouse of the
Australian economy.
On November 22, 2010,
this was put to the test. QR National was floated at A$2.55 a share, discounted
to A$2.45 for retail investors with a loyalty bonus and priority given to
Queenslanders.
The float defied the
gloomsayers, closing up 4 per cent on the first day. It failed to excite local
institutions and retail investors, who bought a far lower than hoped 34 per
cent of the shares on offer.
But heavy interest came
from overseas investors, led by London-based hedge fund The Children's
Investment Fund Management, which bought a 6.1 per cent stake.
Locals bought about half
of the institutional allocation, although they have since increased their
holdings: this month NAB spent A$414.9 million on a 126.4-million-share
package.
By April last year
retail investors had seen a return of almost 40 per cent and by the end of June
QR National's 2010-11 annual report said its market capitalization had grown to
more than A$8 billion, placing it among Australia's 50 largest listed organizations.
Peter’s
Comment
Talk of shares for mum and dad investors in this part of the
world always brings forth the loudest of the gloomsayers.
The gloomsayers play on the fact that many mums and dads have
little understanding of share markets and would rather not know. They were
raised to belief that spare cash should go into residential property, or just
be left in the bank, and that only millionaires can afford to invest in shares.
Dealing with the last point first, shares can be purchased for
less than the cost of a house, car, or overseas holiday and even less than the
amount required to get the best interest rate at the bank.
Far too many people get their knowledge of share markets
from people with little or no experience of shares. They sometimes also listen
to people who did invest but made classic mistakes.
The share market is complex and people should get
professional advice and proceed cautiously. A golden rule is never invest in
one company only. A nest egg of $5,000 to $10,000 would be better spread over
four or five companies. The brokerage fees will be a bit higher but that won’t
matter to an investor in for the long haul.
Another classic mistake is ignoring market cycles when
trading. Too many new investors buy shares in the euphoric but dying days of a
long boom period and panic sell at a loss when the market correction takes
place.
Finally, when a share is selling for less than you paid for
it, you only lose if you sell.
