ownership changes

When the rest of the sharemarket rallied from early March, one stock, which had previously traded in lockstep with the market, was left behind: Infratil going backwards instead.

That's because some investors now think the company has a debt problem, the big bogey of the moment. Those investors may well think their fears are confirmed when Infratil reports a hefty bottom-line annual loss tomorrow, probably around the $200 million mark.

But Infratil is no Nuplex with recession-battered earnings. The losses will mostly be paper losses from writing down the value of its listed investments, particularly its 3.3% of Auckland International Airport, and 33% of Australia-based Energy Developments.

Most likely, Infratil will also write down the value of its British airports, which have been reporting mounting losses as the global recession bites particularly savagely in that country.

In a sense, that's all noise. A key number will be operating earnings, which should come in at about $350m, up 11% on the previous year. The underlying earnings of its key assets, such as its 51% stake in TrustPower and 66% of Wellington International Airport, continue to grow at a healthy pace. But the value of Infratil's assets does matter in the context of its bank debt.

Rob Bode, an analyst at First NZ Capital, says one of Infratil's three banking covenants is that shareholders' funds must be above 40% of total tangible assets.

In early April, Bode calculated this ratio could have fallen as low as 43.3% from 49% in September last year. Infratil had kilometres to spare within the other two operating earnings-based covenants, he reckoned. Later in April Matt Henry at Goldman Sachs JBWere conducted a similar exercise and estimated shareholders' funds were sitting at about 48%.

Of the company's main $520m banking facility, a third is rolled over each year and $174m was duly extended in February. A presentation the company gave to analysts this month showed $327.4m net bank debt at March 31.

Given how gloomy the mood in global financial markets was in February, I would have thought if Infratil really was in trouble with its banks, it would have shown up then. Assuming the banks keep rolling over debt, the first major refinancing event Infratil faces is in May 2011, when $112m of its listed bonds mature.

Infratil has a total of about $750m in listed bonds, including nearly $240m in perpetual bonds, all of which rank below its bank debt, which no doubt gives its bankers considerable comfort, but which also led analysts to the conclusion Infratil is over-geared in the current environment.

All of Infratil's bonds are trading at significant discounts to face value so issuing replacement bonds now doesn't look like a viable option, but who knows how sentiment will have changed by 2011.

Acting chief executive Marko Bogoievski says the bank rollover was uneventful. "There wasn't really even a conversation," he says, although the margin Infratil has to pay has gone up, in line with margins everywhere. Nevertheless, Bogoievski says investor perception is a reality which the company must address. Rather than raising equity at huge discounts, as other companies have been doing, Infratil has been selling assets.

In April it sold Fullers Ferries for $40m, yielding an estimated $12m profit over book value, and later that month it sold properties for $23.1m, a $4.1m profit over book value.

Bogoievski says Infratil will probably exercise its put option to sell its 90% stake in Luebeck Airport in Germany back to the city. That will yield about $60m.

Another possible source of funds is Infratil's warrants which lapse in July. If exercised at $1.62 they could raise $136.7m. The shares mostly traded above that level last week, increasing the likelihood the warrants will be exercised.

While Infratil clearly has plenty of time to sort out its balance sheet, Bode's argument that the company needs to position itself to take advantage of current conditions is compelling. "Arguably, Infratil's model and the market are probably much more prospective than they have been for a long time," he says. With a deregulation-minded government, likely opportunities for private participation in infrastructure projects, and the exit of private equity buyers prepared to pay over the odds for the sorts of assets Infratil favours, "the market is ripe with opportunity".

Rob Mercer at Forsyth Barr suggests Infratil also consider selling its stakes in Energy Developments, Auckland Airport and Austral Pacific.

* Jenny Ruth is a freelance journalist and a columnist for The Independent.

Auckland ferry company Fullers is assuring its thousands of passengers and 174 staff that service levels and fare concessions will not be cut under new ownership.

That includes free travel on NZ Bus services throughout mainland Auckland for holders of monthly passes for the Waiheke ferries, Fullers chief executive Douglas Hudson said.

His assurance followed an announcement yesterday by Infratil - which also owns NZ Bus - that it had sold the 11-ferry Fullers operation for $40 million to Souter Holdings, the private investment arm of Scotsman Brian Souter. Mr Souter was also chief executive of multinational public transport operator Stagecoach, which sold its New Zealand bus and ferry operations in 2005 to Infratil for $250 million.

Since that sale, he had returned to New Zealand to buy Howick and Eastern bus company in Auckland and a 74 per cent stake in Mana Coachlines in Wellington.

His New Zealand-based executive chairman Bill Rae said there would be no retrenchments or restructuring of the Fullers operation and his firm had full confidence in the management.

Campaign for Fairer Ferry Fares spokeswoman Cathy Urquhart, whose group was continuing to push for a reversal of fare rises imposed last year on the Waiheke Island runs, said she feared having to deal with yet another tier of decision-makers and wondered about the future of the free bus travel for monthly ferry ticket holders.

Infratil's sale of Fullers ferries is part of a retreat from underperforming businesses to repay debt.

The infrastructure investor yesterday announced that subsidiary NZ Bus is selling its interest in Fullers for $40 million to Souter Holdings, majority owned by Stagecoach co-founder Brian Souter. Infratil will retain its NZ Bus operations in Wellington, Hutt Valley, Auckland and Whangarei.

Infratil says the deal was part of a programme of divestments which would realise more than $100 million in this financial year. The money would be used to repay debt of about $1.2 billion including infrastructure bonds, perpetual bonds and bank debt. Infratil executive Tim Brown said the $100 million also included exercising the right to sell Lubeck Airport in Germany, worth about $60 million, and the sale of some bus depot properties in Auckland.

"In this environment we do have to look at recycling some capital and cut back on where you can't see them generating strong returns. The short term for us is going to be debt repayment but in the medium term there are various opportunities."

He would not comment directly on one analyst's suggestion that Infratil's other underperforming European airports could be next but said it was hard to run with a loss on a low-return asset in the current environment. Around 75 per cent of Infratil's investments, including Wellington Airport and TrustPower, were performing well, Brown said. "You have to say to yourself, can you have 25 per cent of the business not generating a return? In this type of environment you can't."

Souter's purchase of Fullers sees Brian Souter back on deck there after four years. In 2005 Stagecoach NZ sold its bus services and ferry business to Infratil for $253 million. Souter Holdings, which operates Howick & Eastern buses in Auckland, also has a 74 per cent ownership of Mana Coachlines in Wellington.

Brown said the Fullers sale signalled the intention of NZ Bus to focus on developing its core bus business. "The bus business is definitely one we like and we're enthusiastic about it."

Fullers' sale price reflected the market. "It wasn't a great price but I think it was a fair price," he said.

Forsyth Barr's head of research, Rob Mercer, said the sale was a signal that in tough conditions assets that were not strategic would be sold. "Their European airports are underperforming and I suspect they'll be looking to liquidate those unless they want to hold on to them long term. "It sets the scene for how they're going to shore up their balance sheet and get themselves in a position to go forward when they can see the light of day."

Infratil shares closed unchanged at $1.47.

Grocery giant Foodstuffs' presence in liquor retailing could get a shot in the arm as it looks to swallow Liquorland.

The co-op, which controls around 56 per cent of the grocery retailing sector, is understood to be one of several parties interested in purchasing the 72 stores of DB Breweries' franchise retail chain. Besides supermarket wine and beer retailing, Foodstuffs also operates the large format liquor store Duffy & Finn's, and the smaller format Henry's.

Success in the Liquorland bid could add fuel to the already intense rivalry with Woolworths.

The Australian-owned supermarket firm is still pursuing Liquor Licensing Authority approval for store-within-store models selling spirits as well as beer and wine - despite being denied a bid to set up in a Christchurch Countdown in what was regarded as a test-case decision.

And success for Foodstuffs could spell trouble for independently owned stores, which cannot compete with the supermarkets' buying power. Large liquor chains have a slight edge in market share, controlling around 53 per cent, to the independents' 47 per cent.

Foodstuffs was not commenting on speculation of the bid, as was DB, citing confidentiality agreements. A DB spokeswoman said the company decided to review the option of selling the Liquorland franchise after several unsolicited expressions of interest. "We're not committed to a sale - we're investigating the possibility. "We just received a bit of interest and like any business, we evaluate opportunities as they arise. "Liquorland is a successful asset for DB Breweries, so while we are looking at the option to sell, we will only consider this if a suitable buyer is identified."

Cranleigh Merchant Bankers was appointed last month to evaluate bids and manage the sale process. Evaluation of a possible sale will take place over the next few months. The spokeswoman said any sale would ensure the future interests of franchisees and staff, and the continuation of the franchise as a whole. A sale would also need to ensure that DB retained "an excellent relationship" with the franchise, retaining placements for DB products within Liquorland outlets, the spokeswoman said.

The longstanding Arbuckles brand is about to fade into oblivion as the manchester chain's new owner, Jan Cameron, liquidates stock in preparation to close the stores.

Ms Cameron, the former Kathmandu owner, is expected to use the sites to launch a new chain of homeware stores called Dogs Breakfast Trading Company, which she has already set up in Australia.

Ms Cameron, who has a wealth of $320 million according to the 2008 National Business Review Rich List, bought Arbuckles two weeks ago for $4 million from Postie Plus Group. She took over 13 stores throughout New Zealand, bought all the stock and re-employed most of the staff. Those stores were now advertising closing down liquidation sales.

Arbuckles was founded 35 years ago by John Arbuckle, who started the chain out of a van in Christchurch. He and his wife Vicki sold it to Postie Plus in 2003 for $9.5 million.

Ms Cameron could not be reached directly, but a spokeswoman at Arbuckles' head office in Christchurch said she had told staff she did not want to comment.

Dogs Breakfast Trading Company sells furniture, homeware, crockery and premium pet food, according to the store's Australian website.

Ms Cameron owns a chain of five homeware stores in New Zealand, called Nood. It was not known if she would use some of the former Arbuckles stores to expand Nood.