Failure to Agree on Sale with Tranz Rail
Regret at Failure to Agree on Sale Process with Tranz Rail
“It is with regret that the Regional Council advises the public that attempts to agree on a process with Tranz Rail for the sale of the Tranz Metro Wellington rail commuter system are deadlocked,” said Regional Council Chairperson Margaret Shields.
“At this point our joint-venture with Stagecoach remains a willing buyer, but Tranz Rail are unwilling to remove what we consider to be an unreasonable condition placed upon us.”
Ms Shields said that for nearly three months the Council had been seeking clarification from Tranz Rail as to whether they were willing to remove the condition on the sale process to enable due diligence to begin.
“At issue is Tranz Rail’s demand that the joint-venture make an indicative bid for the Tranz Metro business before allowing us to undertake a thorough due diligence. We have made it absolutely clear that with public money involved we cannot, under any circumstances, place a bid without fully examining the books. This is not a normal business transaction – public money is at stake and therefore the standards of financial accountability are very high.”
Ms Shields said that at a meeting yesterday afternoon with Tranz Rail Managing Director, Michael Beard, she had again sought a definitive answer to the joint-venture’s request that the bid condition be dropped.
“Mr Beard indicated that he was unable to agree to our request, but said that he would discuss it with a sub-committee of the Tranz Rail board. Given the high public interest in this issue, and the considerable time that has been spent trying to agree on a sale process I informed Mr Beard that it was now necessary for me to update the public on developments.”
“There has been considerable public interest in this process, and an expectation that progress would be made. I certainly hope that Mr Beard receives a positive answer from his Board to our request. However, given the delay to this point I am not hopeful about the prospect.”
Ms Shields said that the Council’s concern stemmed from Tranz Rail’s demand that the joint venture makes an indicative bid for the Tranz Metro business solely based on unaudited, ‘reconstructed’, historical accounts.
“Only if they were satisfied with the indicative bid would Tranz Rail allow us to proceed with due diligence. We proposed instead that we should move quickly to conduct full due diligence to allow a firm offer to be made. The Council is a public body, and it is public money that would be committed. Tranz Rail is being completely unrealistic to expect a bid before due diligence has been undertaken.”
Ms Shields said that the Regional Council and Stagecoach had major concerns about being able to verify the information Tranz Rail offered to provide for an indicative bid. Among the concerns were:
Tranz Metro (Wellington) has not been a stand-alone company and by Tranz Rail’s own admission, not even a fully costed stand-alone business unit. On this basis we cannot have confidence that the ‘reconstructed’ financial information would truly reflect the value of the business – particularly as the information was not the subject of an independent audit.
The ability of the business to operate in the future, and its value, is dependent on the ongoing contracts between Tranz Rail and the Tranz Metro Wellington business once it has been separated. We could not see how these factors could be satisfactorily covered without due diligence.
The arrangements required for track access are likely to have a material impact on the value of the Tranz Metro (Wellington) business. A sensible estimate of the value of the business cannot be made without agreement on the cost of track access.
Ms Shields said it was highly regrettable that Tranz Rail had taken such an approach during the sale process. “Stagecoach and the Council have put together a team of advisors from New Zealand, Australia and the United Kingdom who are ready to begin due diligence on short notice. We are still keen to do so should Tranz Rail wish to reconsider its position.”
“I am particularly disappointed for the commuters of Wellington. Given a successfully negotiated sale I believe the future of the rail service looked bright. We have a committed, long-term business partner in Stagecoach and it is urgent that the quality of service be improved.”
“We entered this process with the goal of a better deal for Wellington commuters and ratepayers. That is still our goal,” said Ms Shields. “In the meantime the current rail service contract continues with Tranz Rail responsible for the operation of commuter trains.”
Questions and Answers on the Deadlocked Talks on the Sale of Tranz Metro Wellington
What is an indicative bid?
Indicative bids are made when a number of buyers are competing to purchase an asset. The vendor seeks indicative bids to determine which buyers are offering a price it is willing to shortlist. Only those within a price range acceptable to the vendor are then allowed to proceed to due diligence.
Why did the joint venture refuse to lodge an indicative bid?
There are several reasons why the joint-venture refused an indicative bid:
Tranz Metro has no published history as an incorporated entity and to this day it remains a loosely defined operating division of Tranz Rail. For this reason the quality of the information offered to enable an indicative bid to be made was not expected to be of a standard acceptable to the joint-venture. The joint-venture was the only party negotiating to purchase Tranz Metro and therefore an indicative bid could have no purpose except to raise minimum price expectations prior to due diligence. Tranz Rail had advised the joint-venture that any subsequent move in price outside of the indicative bid would have to be fully justified.
Tranz Rail says that the purpose of the indicative bid was to determine if you were a committed buyer. Doesn’t your refusal prove you weren’t.
The joint venture has always said it was a committed buyer – but not at any price. We believe our commitment to a purchase process has been demonstrated through the following work:
Forming a joint venture with Stagecoach and developing the commercial structures necessary to purchase and operate Tranz Metro Wellington. Repeated public commitments to undertaking due diligence. Forming a team of local and overseas experts in preparation for undertaking due diligence.
Tranz Rail says the joint-venture did not behave in a normal commercial manner.
This is not a normal commercial proposition. Significant public money is at stake, and therefore the integrity and level of information required is higher. That is why it was unreasonable for Tranz Rail to expect an indicative bid based on unaudited, reconstructed historical accounts.
Q. Why have discussions taken so long, without even reaching due diligence?
The joint venture has been ready to negotiate for several months. In our view Tranz Rail’s other financial difficulties may have delayed discussions and meant they have not sent their principals to negotiate, preferring instead to use a merchant banker.
Did you discuss price with Tranz Rail?
Following media reports that suggested Tranz Rail expected a price of $75 Million for Tranz Metro, Tranz Rail advised the joint-venture that they expected a sale price ‘materially’ greater than $75 Million. The joint venture refused to discuss price until thorough due diligence had been completed.