John Milford: Wellington should consider selling its stake in the airport

Thursday, 3 May 2018

Wellington City Council owns 34 per cent of Wellington International Airport Limited, an investment worth hundreds of millions of dollars.

OPINION: You run a successful company, employing 20 people. Several years ago, you diversify your investments by buying into something different – a kiwifruit orchard.

It's owned by a company seeking capital to expand, and your investment gives you a 34 per cent shareholding. You have no knowledge of orchards, but it's an investment you can sit and watch grow in the hands of your experienced majority partner.

28-06-16 News Photo; David White/Fairfax. John Milford, Chief Exec Wellington Chamber of Commerce

When you're faced with having to upgrade your own business to remain competitive, you have a decision to make: borrow and face servicing costs, or cash in your orchard shareholding.

It's a fictitious scenario, but if you were a business with assets you couldn't control but could sell to make improvements to your core operation, wouldn't you at least consider it?

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Over the past few weeks I've talked about the nice-and-need-to-have spending habits of local government, questioning what expenditure should focus on, through to the rising rates pressures faced as a result of unfunded mandates and funded un-mandates.

To move the region forward, Wellington City Council is looking to improve on the city's assets by building a convention centre and movie museum, an indoor events arena, and to fix the Town Hall. And all for good reasons.

But how to pay for them?

Right now, it's proposing to borrow a further $500 million for these and other projects, but is that the best or only option?

Andy Foster prudently notes borrowing that much will take us from paying $1 million every two weeks in interest to more than $1 million every five days in repayments at today's rates. That's a fairly big bill. And what happens if interest rates rise?

So, what about other options?

A good one to look at is the council's 34 per cent shareholding in Wellington International Airport.

Investment services company Forsyth Barr values the airport's total shares at $1.1 billion, meaning the council's holding is worth about $375 million on market value.

As a minority shareholder, there isn't a lot of influence the council can exert when it comes to making the assets pay. Last year it received just $12.1 million in dividends. The airport company retained most of its earnings for reinvestment.

There's a further question: could that 34 per cent be worth more than $375 million?

I've spoken to a few industry experts. Forsyth Barr says that in the event of an airport sale, a multiple in the order of 20 times operating earnings would not be out of the question.

Using the airport's operating earnings of $90 million and deducting the $400 million or so of debt would value the airport company's total shares at around $1.4 billion. The city's 34% share would return the city around $475 million.

It's not an unrealistic scenario.

Auckland International Airport is in the process of selling its 24.5 per cent stake in North Queensland Airports for $395 million. That's a transaction multiple of 22 times operating earnings, and I would have thought Wellington, being a vital link in New Zealand's airways network, would be at least the equal of two smaller airports at Cairns and Mackay. Maybe a multiple of 20 is too low?

There will be those who say selling an asset that has provided up to $12 million a year of income would be foolish. But by not borrowing, the council would save in loan servicing.

The council is tasked with spending and investing ratepayer money in the most efficient way it can, and I have serious doubts that holding on to an asset over which it has very little control while borrowing significantly more or imposing additional taxes to pay for vital infrastructure is that most efficient way.

As ratepayers and business owners, we're advised to pay off our mortgages and debt first, and councils should be no different.

Wellington Council should be taking a balanced view and maximising the asset base, including recycling assets to achieve the best outcome for all ratepayers. Remember, it's not their money.

John Milford is the chief executive of the Wellington Chamber of Commerce