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Cablegate: Ongoing Saga of the Sale of the Auckland Airport

VZCZCXRO9587
RR RUEHNZ
DE RUEHWL #0103/01 0791833
ZNR UUUUU ZZH
R 191833Z MAR 08
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC 5151
INFO RUEHNZ/AMCONSUL AUCKLAND 1638
RUEHBY/AMEMBASSY CANBERRA 5144
RUEHOT/AMEMBASSY OTTAWA 0325
RUEATRS/DEPT OF TREASURY WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RHEFHLC/DEPT OF HOMELAND SECURITY WASHINGTON DC
RUCPDOC/USDOC WASHDC 0216
RHMFIUU/TSA HQ WASHINGTON DC

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

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