Australian rail firm shines light on privatisation

[John Ashworth]

Oz rail firm shines light on privatisation

By Greg Ansley
5:30 AM Saturday Jul 28, 2012 NZ Herald

As bosses and workers at state-owned firms, prospective institutional investors and mum and dad punters get ready for the great asset sell-down, across the Tasman rail company QR National is shining a light on the pitfalls and pay-dirt.

This week Australia's biggest rail freight operator, QR National, was in court, hammering out the industrial legacy of its switch from state to private ownership.

The Queensland company wants to cut more than 500 jobs, adding to 600 shed last year as part of a top-to-bottom overhaul of operations that chief executive Lance Hockridge said was needed to rid QR National of an inheritance of bureaucracy and excessive overheads.

As company negotiators went back to the table with unions, QR National was locking in new deals against the background of China's slowing economy, forecasts of an end to the mining boom, rising costs and domestic uncertainties.

In the past few weeks QR National has signed a 10-year contract to haul export coal from Cockatoo Coal's central Queensland mines, agreed to work with Indian-owned Adani Mining on a new line out of the coal-rich Galilee Basin, and will test the feasibility of building an independent railway with Atlas Iron in Western Australia.

Another major test lies ahead: the promised sale of the 34 per cent stake still held by the state Government some time after QR National announces its 2011-12 results late next month, a package worth almost A$3 billion ($3.9 billion) and potentially one of the biggest capital offerings of the year.

While the new state Liberal National Party Government elected in March has reversed its earlier opposition to the privatisation of QR National, the timing has yet to be announced.

Premier Campbell Newman said when he took office that the Government's holding would be sold only when it could realise the best price. Although still well above IPO levels, QR National shares have eased from a peak of more than A$3.50 to A$3.14 on Thursday.

The sale will be used to help retire state debt of about A$62 billion.

Yet when the former Labor Government announced its plans to split the state-owned rail carrier into two divisions, keeping ownership of passenger operations and selling freight as a separate new company, many investors viewed it as flogging tarnished silver.

And the timing of a November 2010 float added to forecasts of doom: economic storms were still lashing the world, memories of Telstra losses scarred the mum-and-dad investors QR National hoped to attract, the market was suspicious of IPOs, and the failure of the Myer float circled like an albatross.

Warnings of future debt scared others. The company was committed to a A$3.75 billion capital building programme and borrowings of A$2.4 billion, which a consortium of big mining companies led by BHP Billiton and Xstrata claimed would overstretch a privatised QR National.

The consortium's later A$5.1 billion offer for the company was declined.

Analysts and fund managers also warned that the terms of the float were unfair to retail investors, that the company was overvalued, its float was priced on growth estimates two years out when massive new debt would have been raised, and that more global turmoil lay ahead.

Billionaire miner Clive Palmer said he wouldn't touch the stock with a barge pole.

There was also brand awareness.

While other big IPOs had national recognition, QR National was almost unknown outside Queensland, forcing the launch of a A$15 million national marketing campaign.

And, politically, the knives were out.

Former Premier Anna Bligh's Government was in terminal decline and her decision to sell QR National as part of a A$14 billion privatisation programme to shed debt and regain Queensland's AAA rating triggered outrage.

The plan was lashed by the LNP despite its own policies of privatisation, unions protested in the streets, voters abandoned Labor and party members quit in droves.

But there were powerful underlying strengths, recognised abroad if not at home.

QR National is the nation's largest rail freight hauler with about A$12 billion in assets, 2600km of track and 746 locomotives and, outside Queensland's massive coalfields, carts bulk haulage in Western Australia and containers down the eastern seaboard.

And while doubts are emerging about Asian demand, resources will remain a massive powerhouse of the Australian economy.

On November 22, 2010, this was put to the test. QR National was floated at A$2.55 a share, discounted to A$2.45 for retail investors with a loyalty bonus and priority given to Queenslanders.

The float defied the gloomsayers, closing up 4 per cent on the first day. It failed to excite local institutions and retail investors, who bought a far lower than hoped 34 per cent of the shares on offer.

But heavy interest came from overseas investors, led by London-based hedge fund The Children's Investment Fund Management, which bought a 6.1 per cent stake.

Locals bought about half of the institutional allocation, although they have since increased their holdings: this month NAB spent A$414.9 million on a 126.4-million-share package.

By April last year retail investors had seen a return of almost 40 per cent and by the end of June QR National's 2010-11 annual report said its market capitalisation had grown to more than A$8 billion, placing it among Australia's 50 largest listed organisations.