WHAT DOES THE AIR NEW ZEALAND RECAPITALISATION PLAN MEAN FOR INVESTORS?
Mark Lister, 31 March 2022
The long-awaited Air New Zealand recapitalisation plan was announced last night, and the details were largely as markets had expected. However, many smaller shareholders will be wondering what it means for them, and what they should do from here.
Let’s start with the numbers. The entire package is worth $2.2 billion, although the part investors should focus on is the $1.2 billion rights issue.
The other one billion is important, and it will put the company in a stronger position too. However, that’s between the company and the government for now.
A rights issue means existing shareholders will get the "right to buy" a specific number of new shares at a specific price. In this case, for every one share they already own they’ll have the right to purchase another two new ones, at a price of $0.53.
Air New Zealand will issue more than two billion new shares in total, in exchange for $0.53 each. There will be $1.2 billion of fresh capital in the business, and the total number of shares on issue will triple.
When you add this new capital to the current value of all the shares in the company (based on the most recent share price) and divide that by the total number of shares that will be on issue when the dust settles, you get a share price of $0.81.
That's what we call the TERP, or the theoretical ex-rights price. This is an important number to keep in mind, because it's a guide as to where the shares could trade when all is said and done.
The first thing people will notice is that $0.53 looks to be a very low price, not only compared with the TERP, but especially compared to where the share price has traded in recent times.
Air New Zealand closed at $1.38 before the announcement was made, it has averaged around $1.50 so far this year and even in the depths of March 2020 the lowest it fell to was $0.80.
At $0.53, the new shares will be offered at 61 per cent below the current share price, and 35 per cent below the TERP. Those are hefty discounts, but they're not abnormal for this sector.
Airlines are at the riskier end of the industry spectrum. There are numerous factors beyond their control, not only global pandemics but also fuel prices, currencies and consumer demand.
This higher sensitivity to the economic cycle means they often experience higher highs and lower lows. When airlines around the world raise money from shareholders, they need to do so at an attractive price to adequately compensate investors for this.
Air New Zealand will also want this transaction to be successful, and when you’re raising such a mammoth amount you need to make sure the price is a knockout one to ensure the deal gets done.
This is a traditional rights issue, so the rights will trade on the NZX in their own right for a period, alongside the regular Air New Zealand head shares.
It's been a few years since we've seen one of these, and it will be a new experience for many newer investors.
Importantly, if you buy one of the rights on market, you don't yet own one of the new Air New Zealand shares. You'll have simply bought the right to buy one for $0.53.
It's hard to know at what price the rights will trade. That all depends how investors see the opportunity to buy new shares at $0.53. If they think that’s a good deal, the price of the rights will reflect that.
For existing Air New Zealand shareholders, the decision you need to make is whether to take up your rights, or not. In any rights issue, there is always a group of shareholders who choose not to participate, for various reasons.
The new shares that aren't taken up will end up being sold in a bookbuild process in early May. This is a bit like an auction amongst the large brokers and institutional investors, and any premium over the $0.53 will be returned to those who originally owned the rights.
While doing nothing could still see you get something in return for your rights, your original shareholding will be heavily diluted and will be worth less, based on where the TERP suggests the new share price could be.
That’s the price an investor pays for choosing not to participate in a capital raising, especially when one is being undertaken at such a large discount.
If you’re an Air New Zealand shareholder and you want a second opinion on what to do, I would suggest talking to your financial adviser, or asking whichever organisation you usually buy shares through.
They should have in-house research on the company they can supply you with, and if they’re worth their salt they’ll be able to give you some sensible guidance on what you should do next.
Air New Zealand is an iconic company, and we all need it to be strong and well-capitalised. This transaction should put it on a much sounder footing and allow it to refocus on the future after such a difficult period.
However, recapitalising the balance sheet doesn’t necessarily guarantee success, and there are still many hurdles in front of the company.
Let’s hope these are outweighed by opportunities as the world returns to something that looks more like the good old days (of 2019).