news

all,

could be old news for some:
http://www.news.com.au/business/story/0,23636,23048307-14334,00.html

(January 14, 2008 )
IN the next two weeks, KPMG will complete a study into rail and port operator Asciano's non-performing assets, which will verify the dire financial distress the assets are in, and confirm the need to sell them -- if it can find a buyer -- or close them down if it can't secure massive subsidies from the state governments.
The businesses in question include the New South Wales and Victorian grain rail freight services, the Victorian Patrick PortLink rural container business and the Tasmanian Pacific National intermodal operations.

It is understood that Asciano is in discussions with the NSW, Tasmanian and Victorian governments about the future of these assets, and will use the KPMG report as ammunition for a quick resolution.

For Asciano, the decision to put the blowtorch on the governments to do something about these dud businesses, which are estimated to lose more than $60 million a year, will help the group's earnings profile and allow it to redeploy some rail assets.

Right now it has about $210 million of rail assets employed in the affected rural sectors. These businesses are not commercially viable and are dragging down earnings.

Indeed, Asciano loses $40 million a year, or more than $3 million a month, from its Victorian and NSW grain rail freight services.
The closure of export grain rail services in NSW and Victoria would have a big impact on the social and economic wellbeing of the farmers in the region. It would also have a major environmental impact if these freight services were moved on to road transport.

Given that the business loses money, it is hard to envisage a white knight buying them out.

But to close them down would be something the Victorian and NSW governments couldn't stomach politically, so the most likely scenario is government subsidies to Asciano to the tune of $60 million-plus.

Negotiations with the NSW Government follow the cessation of an obligation by Asciano to provide grain services in NSW.

That obligation lapsed last year and was part of a deal struck to form PN when the company bought the NSW government-owned Freight Corp a few years ago. Another business causing grief is its Victorian rural container business - estimated to lose more than $10 million a year.

In 2005, PN won a $120 million subsidy over 10 years from the federal Government and the Tasmanian Government after threatening to close its Tasmanian intermodal freight operations because they were not commercially viable. It did this a year after buying the Tasmanian operation from the Government in 2004.

However, the 10-year rescue package is only valid on the basis that volumes remain at a certain level. Once they drop below a certain point, the rail operator is believed to have a legal right to invalidate the memorandum of understanding.

It is currently in talks with the Tasmanian Government, which is saying it is committed to keeping the rail running and is therefore open to other parties stepping in.

As a company that has been bludgeoned on the share market since it was spun out of Toll Holdings last June, it needs to do something to move forward. (The business is a collection of the previously listed Patrick assets, excluding the aviation assets and transport and logistics assets. PN accounts for 52 per cent of earnings, container ports 37 per cent and car handling/bulk ports the rest.)

In its short life, its shares have gone from $10.76 to $6.25.

The shares started falling in earnest in August, when it revealed it was building a stake in the world's biggest pallet group Brambles, which is more than four times its size.

This coincided with the US sub-prime loan crisis and Asciano's largest shareholder, US funds management giant the Capital Group, dumping 4.7 million shares, or more than 1 per cent of Asciano's shares, and the Commonwealth Bank offloading almost 10 million Asciano shares.

If the shares fall much further, putting it on a market capitalisation of $4 billion, Asciano will become a sitting duck to an industry operator or financial investor.

Its businesses hold attraction for an industry player or financial investor to access leading positions in Australian rail industries and ports. Its key assets, PN rail and Patrick's port terminals, give it exposure to strong container stevedoring, interstate intermodal rail freight and southern states coal exports. And unlike other listed infrastructure companies, Asciano is one of the only companies that does not pay management fees.

Asciano has high-growth, long-duration cash flows, and few competitive threats. While its debt level is high, with more than $5.2 billion in syndicated facilities, plus a $108 million bank guarantee facility, the average maturity is three years and the nearest maturity is $258 million in May.

It explains why its largest shareholder, chief executive Mark Rowsthorn, has been frantically buying shares. He bought an extra 500,000 on January 7, lifting his holding to 11 per cent, which makes any takeover more difficult.

Mr Rowsthorn, who has much of his wealth tied up in Asciano, will be hoping a Macquarie Equities report released last year is right. In the report, analysis by its Quant team found that child entities traditionally underperform in the near term after a demerger, and consequently strongly outperform after their first reporting period, with a median outperformance of 16.9 per cent over 12 months.

The report argues that the larger the demerger, the longer the period of "probationary'' underperformance. Asciano reports its first set of results on March 12.

At these results the market will be expecting it to have resolved its non-performing business issues, as well as the completion of a coal haulage contract deal with Xstrata and Rio Tinto to haul coal into Queensland.

This deal, which is expected to be worth more than $200 million a year to Asciano, is scheduled to begin in the second half of next year.

If Asciano can clean up its under-performing businesses, offload its stake in Brambles and announce its coal deal in Queensland, as well as give a clear outlook for 2008, the market will be more relaxed. Until then, it will remain nervous