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.