N.Z. Steel backs Govt plan

Press, 12 February 1986, Page 38

N.Z. Steel backs Govt plan

Simon Louisson

By

Auckland New Zealand Steel directors have recommended that shareholders accept the Government’s reconstruction plan. The plan involves granting the Government 81 per cent of the enlarged company’s shares in ex-' change for the Government taking SI.IB of debts incurred in the expansion project. Shareholders have been sent notices for an extraordinary general meeting in Auckland on March 6 to consider the plan. The notice includes a 61-page explanatory document outlining the background to the company’s involvement in the huge steel expansion project. The expansion led to the company’s problems. At a press conference in Auckland yesterday, the N.Z. Steel managing director, Mr John Ingram, said shareholders had little option but to accept the recommendation. He said the plan was the most “palatable” of the options. The explanatory docu-

ment states that the principal alternatives are either to negotiate an alternative reconstruction more beneficial to shareholders or to abandon New Zealand Steel Development (the expansion project) and, if possible, continue the present operations of N.Z. Steel.

The document warns that if the reconstruction plan is not approved all negotiated obligations accepted by the Government will be at an end.

“In the opinion of the directors, these alternatives to the reconstruction plan involve risks and uncertainties which are unacceptable in the light of the reconstruction plan option,” states the document.

If the plan is accepted, shareholders will vote to increase the company’s capital from S2OOM to S4OOM of which S29IM shares will go to the Government. Existing shareholders will get prior entitlements to any dividends for 1986 and 1987.

Any company wishing to purchase more than 10 per cent of the Crown’s

holding will be obliged to offer the same terms to existing shareholders. Shareholders will also be allocated two options for each share at 150 c, exerciseable on March 31, 1989.

Asked how happy he was with the reconstruction plan, Mr Ingram said that, like all negotiations, there were aspects the company was not happy about.

He said that the changes which had occured since the project was conceived called for more Government support rather than less, but the plan recognised the changing attitude of Government.

Mr Ingram does not see N.Z. Steel as a victim of Government or politics, but the plan was necessary because of changing attitudes and circumstances.

Essentially, N.Z. Steel management says that the need for reconstruction came about because of changed perceptions — the company saw the Government as a joint-venture partner, but the new Gov-

emment believed that comercial risk-taking should be borne by shareholders.

The company does not see the plan as a “bailout,” but a recognition of changed circumstances. Mr Ingram says the expanded steel complex will produce goods that are internationally cost-com-petitive, and with good cash flows. He also points to the 1200 jobs created and the foreign exchange earnings. The explanatory document outlines a number of areas where it says Government action and policies contributed to a breakdown of the jointventure concept. They list coal price increases, capital cost increases caused by Government, the reduction of import protection, and foreign exchange losses as attributable to Government.

Capital cost increases were caused by the Government’s requirement that local content should be given preference. The company blames the Government for not doing

enough to stop inter-union disputes, which were at the root of the industrial problems. If the plan is accepted, the company is projecting considerable long-term profits and “adequate” short-term profit. The 1989 profit is projected at SUM, compared with S3SM in 1985, but this will rise to S79M in 1992, SI77M in 1995 and S29BM in 1998.

Mr Ingram acknowledges that the projections < are based on a number of assumptions. The exchange rate, which is crucial to the international competitiveness of sales, is assumed as US4IC in 1995. An increase in the rate to 44c would decrease projected sales by 8 per cent If shareholders accept the plan, Mr Ingram is not concerned to whom the Government sells its 81 per cent holding or if it can. He is concerned that it does not give it away too cheaply. “If we have a choice, we would prefer a group with no-one dominant, and perhaps some share

to an overseas company to complement our strengths.” He is also concerned that the buyer operates the plan at full capacity. A crucial question for any buyer will be the availability of tax losses. A company must take more than 40 per cent of N.Z. Steel to get the full $1.68 capital costs plus financing costs for tax purposes. Mr Chris Ryan, a director for an Australian merchant bank, Schroders, who is now working for N.Z. Steel, says that it depends on whether the company which buy has the ability to use the tax allowances and whether the investor is willing to take a long-term view. To buy now will be cheaper than in two years. He could not put a price on the company, though. Mr Ingram is expecting shareholders to express some frustration at the meeting, but he says most of the changes which have necessitated the reconstruction have been outside the control of management.