ONGOING SAGA OF THE SALE OF THE AUCKLAND AIRPORT

UNCLAS SECTION 01 OF 02 WELLINGTON 000103 SIPDIS SIPDIS SENSITIVE STATE FOR EAP/ANP, EEB/TRA/OPT, WHA/CAN E.O. 12985: N/A TAGS: EAIR EFIN ETRD ECON PREL PGOV NZ SUBJECT: ONGOING SAGA OF THE SALE OF THE AUCKLAND AIRPORT REF: 07 WELLINGTON 589 ¶1. (U) Summary. The perseverance of the Canada Pension Plan Investment Board (CPPIB) seemed to pay off last week when local shareholders of New Zealand's largest airport approved the CPPIB's NZ$1.8bn ($1.4bn) bid for a 40 percent stake in the Auckland International Airport (AIA),which handles 70 percent of the country's international air traffic. Some 27,000 private investors voting in favour of the sale ignored outcries over foreign ownership by politicians and tendered more than the required shares needed (39.2 percent desired by CPPIB) by the Thursday (3/13) deadline. The rebuff by the private shareholders now puts the unenviable final decision squarely in the hands of the Labour Party's Associate Finance Minister and the Land Information Minister under rules recently enacted which were meant to forestall the inevitable. The pressure on the government to come up with the "correct" decision will come to a head when the April 12 deadline on the bid lapses. End Summary. ¶2. (U) Background. Labour came to power eight years ago promising an end to "asset sales," believing that the sale of state services to private shareholders had been the most unpopular element of the previous 15 years of economic reform. It was careful, though, to avoid the logical extension of that promise - a buy-back of privatized companies. Labour did, however, inherit an economy much stronger and more efficient because the privatization of former state assets exposed them to competition and share market reporting requirements. Labour's polling continued to show that their supporters feared foreigners controlling key assets, so the Government kept its word by selling nothing of public concern nor did it consider re-nationalizing assets. The near-collapse of Air New Zealand forced the Government to take an 80 percent stake in the airline in January 2002. It also repurchased the railway, though not the rolling stock in September 2004. More recently, the Government has been negotiating with the current rail operator, a subsidiary of Toll Holdings of Australia, to buy back the trains, not because it particularly wants to run a national railway but because it finds itself unable to recover the costs of maintaining the network from Toll New Zealand. Finance Minister Michael Cullen says that if the state has to subsidize a private operator he would sooner "subsidize ourselves on behalf of the people of New Zealand." New Zealand Considers Selling AIA to Canadians -------------- - ¶3. (SBU) The saga of the sale of AIA began in June 2007 when Dubai Aerospace Enterprise (DAE) first offered to purchase a 60 percent share in the airport by offering a per-share price of NZ$3.80 (see reftel). By September it was forced to withdraw its bid, saying the airport's management board had not done enough to promote the deal. Some commentators believe that DAE's strategy may have been flawed by relying too heavily on seeking approval primarily from the Auckland and Manukau City Councils. Labour's Trade Minister, Phil Goff weighed in during the tender and expressed fears of foreign control of a key New Zealand asset. Xenophobia prevailed and DAE withdrew its offer. The CPPIB success to date has been attributed to their sheer tenacity. Although CPPIB expressed initial interest in AIA in June 2007 along with DAE its per-share offering did mot match DAE was therefore relegated to second place. With DAE out of the running, CPPIB's offer was reinvigorated. Throughout the process they have managed to be accommodating and pragmatic and their perseverance may yet win out. The Canadian High Commission informed Post it was neither engaged in discussions with the GNZ nor actively lobbying on CPPIB's behalf. The Pension Fund is independently managed; therefore, all parties are treating the sale as a purely private sector issue and CPPIB has not sought the Canadian government's assistance. ¶4. (U) During the course of the long public debate, the shareholders watched the market value of their holdings drop by as much as 25 percent (approx NZ$300 million) as politicians openly spared and expressed concern that the sale of the Auckland Airport to a foreign bidder would amount to a loss of a strategic national asset. In the end, shareholders actually voted 57.7 percent in favour of the CPPIB which only required a 50 percent favourable vote for the offer to go forward. The airport's two biggest shareholders, the Auckland and Manukau City Councils, which hold about 23 percent, both retained their stakes and voted against the bid. A crucial turning point came on Tuesday (3/11) when a 3.3 percent shareholder, Infratil Ltd (utility holding company) said it WELLINGTON 00000103 002 OF 002 would sell. The next largest shareholder, the New Zealand State Pension Fund with just over 6 percent, also accepted the offer. The deal still has to be signed-off by the New Zealand government under the recently amended Overseas Investment Act (OIA) with a decision needed by April 12 or else the bid lapses. The final decision will be made by Clayton Cosgrove, associate finance minister, and David Parker, the land information minister. If the Government rejects the deal, CPPIB can seek a final review by a High Court judge. Shifting Focus Away from Labour's Policy -------------- ¶5. (U) Prompted by the Labour Party's fears of foreign control of the AIA, Finance Minister Cullen rushed through an emergency initiative last week and passed a legislative amendment to the OIA, thereby limiting foreign ownership of "strategic" land assets to less than 25 per cent. (Note: the government has been challenged to define "strategic" and list those assets that fit that definition but it has chosen to ignore the request. End note.) The government's maneuver came as CPPIB took pains to distinguish itself from other sovereign wealth funds, whose enormous assets and huge appetite for acquisitions have raised protectionist alarm both in New Zealand and the U.S. In answer to these fears, CPPIB lowered its voting rights (i.e., control) in the airport to 24.9 per cent, which it believes will meet the government's new foreign ownership cap. If the deal passes this final test before the April 12 deadline, CPPIB will then have to work co-operatively with the airport's management board and the city councils of Auckland and Manakau, which voted against the bid. ¶6. (U) In a political face-saving tactic, Finance Minister Cullen accused National Party opposition leader, John Key of being "very slippery" on his stance toward the Government's move to protect Auckland Airport from foreign control. Said Cullen, "there's no doubt in my mind that the New Zealand public believes that strategic assets should not pass into overseas control." Mr. Key in turn accused Cullen of political opportunism and undermining confidence in New Zealand as an investment destination but Cullen seized on Key's comments, saying National would allow strategic assets to fall into foreign control. Key defended the National Party's position by saying, "it would have issues over majority foreign ownership of Auckland Airport but we are more relaxed about minority ownership." Prime Minister Helen Clark added to the debate by suggesting Key had held a variety of positions on the issue and she wondered whether he thought it was good or bad if the OIA regulation (i.e., amendment) did not stop the buy out. Key says it's hard to believe in the end that the two ministers will be independent when it comes time to make a decision despite the government already being dealt a slap in the face by the decision made by the Auckland Airport shareholders. Key believes the Auckland Airport deal looks set to end up in the courts. ¶7. (SBU) Comment: The government's sporadic insinuation in the AIA sale is seen by many as politically motivated. As elections draw closer and the center-left Labour-led coalition continues to trail badly in the polls, they seem to be erratically reacting to public opposition to the Canadian bid. Some analysts believe the government isn't ultimately concerned about the economic ramifications of the takeover but what effect the transaction will have on voters' perception of Labour's stewardship of "sensitive strategic assets." Ultimately the government faces some discomfort as it had hoped to avoid responsibility by staving off the final decision but in the end this strategy backfired. The government now must face making a decision that could be seen internationally as detrimental to attracting investment in New Zealand. End comment. McCormick