NZ Super Fund and ACC proposed as new minority shareholders in Kiwibank

By David Hargreaves

NZ Post is going to sell 45% of Kiwibank to the New Zealand Superannuation Fund and the ACC for a combined total of $495 million.

Under the plan, announced by NZ Post chairman Sir Michael Cullen, the NZ Super Fund would take 25% and ACC 20%. The deal values the whole of Kiwibank at $1.1 billion.

It's planned for the $495 million to go toward repaying debt that NZ Post took on to support Kiwibank and to fund operational requirements - but there will be a special dividend to the Government as well, with suggestions this could be "sizable", although no figures were being quoted today.

The move could see Kiwibank's credit rating slip by one notch from the current A+ to A as NZ Post will likely not guarantee Kiwibank's future obligations once the deal proceeds.

NZ Post, NZSF and ACC are currently in discussions over the details of the transaction. A final decision about whether it goes ahead will be made later this financial year, which of course ends in June.

Assuming the deal does go through, both ACC and the NZ Super Fund would be able to raise their shareholdings later through the issue of additional Kiwibank capital. This potential to access future capital will be important for Kiwibank, which has been seen as increasingly capital-constrained under the ownership of a struggling NZ Post.

Sir Michael said there was "no particular bottom line" that NZ Post was looking at in terms of how much its shareholding might ultimately reduce to.

Clearly, however, such comments would suggest that assuming all goes well with NZ Super and ACC as shareholders then, through issues of new capital, those two might end up pretty much wholly owning the bank.

Hot potato

By structuring a deal this way the Government appears to have found a way of injecting some cash into the struggling NZ Post, while avoiding the hot political potato of divesting state control of Kiwibank.

Finance Minister Bill English was quick to communicate that message today. "Kiwibank will remain 100% Government-owned – that is a bottom-line," he said.

"To ensure this occurs, the proposal includes a right of first refusal for the Government over any future sale of shares – which we would exercise."

Standard & Poor's has indicated that following the announcement of the proposed transaction, Kiwibank's long term issuer credit rating (A+) will be placed on credit watch negative pending the proposed termination of the standing guarantee provided by NZ Post. Should the guarantee be terminated, Standard & Poor's has indicated it will result in a one notch downgrade to Kiwibank's long term issuer credit rating (from A+ to A). 

S&P foresaw no change to the NZ Post ratings (A+/Stable/A-1) as a result of the announcement today.

"If the transaction proceeds as planned, we expect NZ Post to retain sufficient sale proceeds to sustain a minimal financial risk profile, in line with our expectations for the 'A+' rating.

'Sizable return'

"Nonetheless, we expect the proceeds of any transaction to provide NZ Post with capacity to make a sizable capital return to its government shareholder," S&P said.  

State Owned Enterprises Minister Todd McClay says that the proposal could see benefits for Kiwibank, NZ Post, ACC, NZSF and taxpayers – but needs to stack up for all parties before it proceeds.

Chief executive of the New Zealand-owned Co-operative Bank Bruce McLachlan welcomed the news around its fellow Kiwi-owned competitor.

"From my perspective this is a huge vote of confidence in the future of New Zealand Banks. It proves New Zealand Banks have both the opportunity to grow materially and compete with the major Australian Banks, and also have access to the critical capital that growth companies require. Banking remains an attractive industry for investors, if the relevant Bank has a competitive market position and a point of difference."

Sir Michael said that while no deal has been finalised yet and it would take some weeks for a process to be worked through, NZ Post had wanted to be "proactive in our disclosure".

"New Zealand Post approached the Government and pursued the initiative because it considers that NZ Super Fund and ACC are strong potential shareholders for Kiwibank as a Crown-owned bank. The two investment funds hold assets of over $60 billion between them, while New Zealand Post continues to face headwinds in its core mail business.”

There were various conditions to be met before the proposed transaction could proceed including due diligence, transaction documentation, board approvals and regulatory approval.

"It is intended that the transaction be completed by the end of New Zealand Post Group’s current [June] financial year," Sir Michael said.

An NZ Super Fund spokesperson stressed that a final decision by the fund to invest had not been made and remained subject to a number of conditions including satisfactory due diligence, NZ Post Board approvals and Reserve Bank approval.

'A rare opportunity'

"That said, this is a rare opportunity to purchase a significant minority stake in a large, unlisted New Zealand company. NZSF and ACC both believe we can add value to Kiwibank through our access to capital and active approach to investment management. NZSF’s and ACC’s long investment horizons are also a good fit with Kiwibank. We are also confident that, in NZ Post, we will be working with an organisation with compatible values and a similar investment approach,” the Super Fund spokesperson said.

This is the NZ Post announcement:

The Crown’s two major investment funds, the New Zealand Superannuation Fund and the Accident Compensation Corporation (ACC), may soon join New Zealand Post as the owners of Kiwi Group Holdings (KGH) Limited. New Zealand Post Group Chairman Sir Michael Cullen announced today that New Zealand Post has received an indicative offer from the NZ Super Fund and ACC to purchase 25% and 20% respectively of Kiwi Group Holdings Limited. The indicative offer, which is subject to a number of matters including due diligence, has been priced on a commercial basis, and reflects the Government’s absolute position that Kiwibank must remain in public ownership. The offer is based on valuing KGH at $1.1 billion, which would mean New Zealand Post receiving $495 million.

KGH is the company that owns Kiwibank and its associated businesses such as Kiwi Wealth Management and Kiwi Insurance. Sir Michael said that “no deal has been finalised yet and it will take some weeks for a process to be worked through, however we wanted to be proactive in our disclosure”. Sir Michael said: “New Zealand Post approached the Government and pursued the initiative because it considers that NZ Super Fund and ACC are strong potential shareholders for Kiwibank as a Crown-owned bank. The two investment funds hold assets of over $60 billion between them, while New Zealand Post continues to face headwinds in its core mail business.”

There are various conditions to be met before the proposed transaction can proceed including due diligence, transaction documentation, board approvals and regulatory approval. It is intended that the transaction be completed by the end of New Zealand Post Group’s current financial year.

Sir Michael said the New Zealand Post Board believes that securing an agreement with these two Crown investors – both essential parts of the New Zealand fabric – would be of significant long term benefit to Kiwibank.

“The sovereign-status NZ Super Fund and ACC are proven public sector investors. Their long-term investment horizons, expertise and access to capital would complement New Zealand Post as a shareholder and support the ongoing development of Kiwibank.”

Sir Michael said New Zealand Post has provided approximately $400 million of capital to Kiwibank over its lifetime. “We believe now is the right time to broaden the bank’s support base within the wider public sector, and this provides the NZ Super Fund and ACC with a rare opportunity to secure a significant minority stake in a large and well-performing unlisted New Zealand business.”

The proceeds would allow New Zealand Post to invest in its core parcels, packages and letters business and pay down debt. It is anticipated that a special dividend would also be paid to the Crown, Sir Michael said. In terms of other matters to be disclosed, it should be noted that in the process of considering the possible transaction it has become clear to the New Zealand Post Board that, in any event, the future of the New Zealand Post guarantee of Kiwibank’s payment obligations will need to be addressed, he said.

"At the time of completing the transaction, New Zealand Post would give not less than three months notice to remove the guarantee. This change would not apply to obligations incurred prior to the date of termination, only future obligations."

And this is the announcement from the Government:

NZ Post’s proposal for the Accident Compensation Corporation (ACC) and the NZ Super Fund (NZSF) to purchase part of Kiwibank will ensure the bank remains wholly owned by the Government, Ministers Bill English and Todd McClay say.

Kiwibank is currently a subsidiary of NZ Post. If the proposal goes ahead, a total of 45 per cent would be owned by the two additional taxpayer-owned shareholders.

“Kiwibank will remain 100 per cent Government-owned – that is a bottom-line,” Finance Minister Bill English says.

“To ensure this occurs, the proposal includes a right of first refusal for the Government over any future sale of shares – which we would exercise.”

State Owned Enterprises Minister Todd McClay says that the proposal, which values Kiwibank at $1.1 billion, could see benefits for Kiwibank, NZ Post, ACC, NZSF and taxpayers – but needs to stack up for all parties before it proceeds.

“When NZ Post’s Chair Sir Michael Cullen approached Ministers with the proposal, he explained it could give Kiwibank access to extra sources of capital for future growth and broaden its exposure to commercial expertise,” Mr McClay says.

“NZSF and ACC would have an investment in a profitable local company. NZ Post would receive a return for the shares, some of which would be used to repay debt built up to support Kiwibank’s expansion and some would be paid to the Government as a special dividend.”

NZ Post, NZSF and ACC are currently in discussions over the details of the transaction. A final decision about whether it goes ahead will be made later this financial year.

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27 Comments

This is amazing! I wonder if there will be further job losses.

Hmmm. Looking at this deal from my own viewpoint , I guess that ACC and the super fund would both have similar sovereign statuses to NZ Post in the eyes of the govt. In so much as they could collectively ask the govt for a bailout of Kiwibank on behalf of its depositors if it gets close to an OBR situation.

This is what I'm concerned with too.

Clever solution to Kiwibank's funding problem. Pity we the people have missed out on a direct shareholding opportunity.

Looks like all the funds for NZ Post's sale to NZSF and ACC are retained by them for them to pay down NZ Post debt and to dividend to the Govt. How does that add to Kiwibank's capital ? Can't see how any of it flows to Kiwibank.

Besides, Kiwibank has the highest leverage of any NZ bank (see here) so they will require a substantial capital injection just to bring them in line with the big 4 Aussies. To get Kiwibank's capital to the relative ANZ NZ level, someone has to pump in another $563 mln which is actually more than NZSF and ACC are paying for their position !

And then there is the 'problem' that Kiwibank does not make enough money for an investor-shareholder (like NZSF and ACC). If they made money like ANZ/ASB/BNZ/Westpac on the beefed up capital that they need, their annual tax paid earnings will need to rise from $127 mln/year to $230 mln/year.

In other words Kiwibank needs to double its profits while it doubles its capital to benchmark like other major NZ banks - assuming it does the same level of business it did in 2015. If it wants to grow, it will need these benchmarks higher.

Otherwise its new shareholders will get increasingly grumpy (and that is because the funds they have invested in this would be better invested elsewhere).

Don't forget, Kiwibank's growth is currently stunted because it has run out of capital and has low profits. Today's 'solution' addresses neither.

They have also become cornerstone investors in irrigation schemes no one else would touch. Which begs the question- have they become a tool of government policy/ideology? These politicians are seeing ACC and NZSF as a cash cow to fund their failed ideology at the cost of future pensions and ACC cover.

Wait until the Greens get in....."This morning, co-leader James Shaw announced a plan to repurpose Kiwibank for the public good and force foreign banks to pass on millions of dollars to mortgage holders and businesses."

So its no longer an arms length business but a Government department, bound to end well.

BTW, The Green's propose to put in $100million....

solves diddly by the looks of it.

yes interesting that no money is going towards KB capital at this stage.
how long before there is a capital raising and NZ posts position gets watered down

DC's post on the "excessive" leverage means that ppl are being even more foolish in putting their money in there IMHO. Yet because its NZ owned and the Greens are going to "fix it", ppl flock in.....like wtf?

This decision today annoys me no end David, for all the reasons you mention as well as many others. First and foremost it is not commercially viable for ACC, NZSF, or KB. There are conflicts left, right and centre. It's smacks of political interference. Heads at ACC, and the NZSF should be grilled on this with a "please explain?". I would also want to grill them on how this fits their investment mandate etc. I feel a OI request wouldn't be out of the question.

Sell the other 55% to TSB, it is after all 100% NZ owned

Seems OK. But if either of the new shareholders decided to sell on then that would be a problem. I don't see government ownership as a priority, but 100% New Zealander ownership is a must have.
Kiwibank is a growing threat to the Aussie Cartel and clearly, as so often in the past, they would pay big bucks to take it out of the picture.
Their lobbyists have probably been working to that objective already.

DCs comments above are very pertinent. Any extra cash needs to stay in Kiwibank and not be sucked out by the Government. It does need Capital.
If Kiwibank contines undercapitalised then sure enough what will we soon see. A kind Aussie bank will offer to take it off our hands and solve the problem. Magic.

This is great news, but it should have been 51%. KB has been a distraction that NZP could have done without. The initial set-up costs and ongoing capital reserve requirements have been a drain on the Government's finances.

very short term thinking, in the long run if it captures 10-15% of the market it will return a lot more than was put in

Good excuse for the Gummint to restart funding the Superfund which would allow KB to receive more capital.

The way to privatisation is clear, as ACC and NZ Super may sell shares to whoever they like in the future, current Govt has right of first refusaal, but what if they, or the next govt "refuse"

Aha, this is effectively a bailout! How much in the SF? How much in the ACC fund? Collectively right now......billions of taxpayers money! So they bailout NZ Post and sure up KB via this quite dubious deal!

Yet, I guarantee KB depositors will still not be getting deposit guarantee protection of any kind regardless

And as I stated some time ago regarding NZ Posts liability to "trust" account holders of KB which they were in no position to backup.... that obligation now goes across all 3 entities...... Or does it? Can wait to read the T&C changes after this

Reasons to be grumpy? Future ownership change means $28 billion Superannuation fund historically returning 9.5% pretax and $29 billion ACC fund historically returning 11.3% gain 41% of a business historically returning 12.2% npat. And it's all kept in NZ so far.

You are right about the "so far"

It is only returning 12.2% plus because it is so highly geared. If it was capitalised like ANZ it would return only 7.8%. If it was geared like I think all banks should be (7x leverage rather than the prevailing 12x, and Kiwibank's 18x) then the ROE would be only 5%.

The NZSF's Adrian Orr knows banking inside out. He also knows investment management. I really can't see him tolerating Kiwibank's current leverage or profits. Will be interesting to see how this plays out.

The NZSF's Adrian Orr knows banking inside out. He also knows investment management. I really can't see him tolerating Kiwibank's current leverage or profits. Will be interesting to see how this plays out.

He will do as he is instructed - his complaints about the cessation of government contributions to NZSF hardly raised a ripple in the Minister of Finance's thinking. Governments don't pay their servants ~$830,925.00 a year to do otherwise.

his complaints about the cessation of government contributions to NZSF
that was a dreadful error and showed me the lack of financial nous of this government .
they would have doubled the size if they had kept it up and more than covered the interest payments with the increased tax take from the fund.
how stupid for BE to say you don't borrow to invest in markets when that is exactly what some of the richest people and funds do when the conditions are right, he showed his credentials to me then
straight after the GFC, stocks and companies were massively undervalued and heaps of cheap credit was available

Political interference? Has Cullen pulled some strings - let's face it he set up the Cullen fund.

I agree David, there is no way an investment vehicle such as ACC, or NZSF would invest in such poor performing assets, if they were acting independently.

This is Muldoonism, National Super, and the 'Consolidated Fund' all over again!!!

Why does the government use Westpac as their bankers? (Sincere question).

because they won the tender, but I'm sure it helps in that process when you have the right people in your team that know who to talk too
http://www.westpac.co.nz/who-we-are/about-westpac-new-zealand/our-execut...