N.Z. Steel shareholders in a no-win position

Press, 4 February 1986, Page 26

N.Z. Steel shareholders in a no-win position

By

SIMON LOUISSON

in Wellington

The management and directors of New Zealand Steel can expect fireworks at the company’s extraordinary general meeting early next month. Shareholders are in a no-win situation — they either accept the Government’s package or their shares fall away in value to virtually nothing. The rescue package agreed between the Government and N.Z. Steel means that the Government gets four shares for every one now on issue in return for taking over the SII3BM debt for the rolling mill expansion project N.Z. Steel’s share price has slumped from a high last year of 295 c to 80c. The questions shareholders are likely to raise at the meeting will revolve around how N.Z. Steel got involved in the project in the first place. How did the company get involved in a $1.68

expansion project on a capital base of only S2OM? Obviously there were political reasons, with the project being an integral part of the National Party’s “think big” platform. The Minister of Finance, Mr Roger Douglas, has insisted in the rescue agreement that shareholders bear some responsbility for the company’s financial strife. “The Government was adamant that shareholders should share the burden with the Crown,” said Mr Douglas. “The company conceived and promoted the project and thus the shareholders have to bear an equitable

portion of the losses.” Even without devaluation, construction cost escalation caused by labour problems, and hefty rises in the cost of electricity and coal, there was always a strong chance that the cash flow generated by the expansion would be insufficient to cover the debts. Many, including Treasury, consider that the project was ill conceived. It was based on extremely optimistic forecasts of world steel prices which have failed to eventuate. There are still major question marks about the international competitiveness of the new rolling

mill process. This will be crucial if the Government is to achieve its stated intention of divesting itself of its 80 per cent shareholding in the company at the earliest possible opportunity. The only companies in the region which could realistically take over the company are Fletcher and BHP. N.Z. Steel has 65M shares on issue and will issue 291 M to the Government, which means a take-over on current prices which will cost around S3OOM. Neither Steel and Tube nor Cable Price Downer, both companies with strong steel idustry interests has expressed any interest in acquiring N.Z. Steel.

FCL’s chief executive of the steel sector, Mr David Delay, says that .until N.Z. Steel has prepared a prospectus on the company no one can get any closer to making a decision about purchasing it. He says the situation is so bad that to be a viable purchase it would have to be an extremely low price. While he says it makes common sense for FCL to tie N.Z. Steel in with its Pacific Steel interests, he is not optimistic about a purchase. He suggests that if the project is competitive on a world scale then the Government may be loath to part with the plant. Mr Delay says that, in view of the Commerce Commission’s recent refusal to allow FCL to increase its holdings in Pacific Steel above 50 per cent, FCL may be faced with the ludicrous situation of being the only New Zealand company interested in buying N.Z. Steel but being prohibited on monopolistic grounds.