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In November 2013, the Government sold 221.3 million shares in Air New Zealand at a price of $1.65 a share, receiving proceeds of $365.2 million. The Crown retained ownership of 582.9 million Air New Zealand shares, which at that date gave it a 53% shareholding in the company.
So what impact did this have on the Crown's financial return on its investment?
The answer is nothing from one perspective, and quite a lot from another.
If you calculate the the internal rate of return (IRR) on the Crown's investment in Air New Zealand on 19 November 2013 (the day before the sell down) the result is 6.6% per annum.
This calculation is based on the following figures:
| Date | $m | |
|---|---|---|
| Initial investment | January 2002 | (892.2) |
| Rights issue | December 2004 | (149.3) |
| Dividends received | December 2002 to 19 Nov 2013 | 601.0 |
| Value of shareholding | 19 November 2013 | 1,326.9 |
| Net total | 886.4 |
The IRR of 6.6% can be broken down into a -7.9% realised return and a 14.5% unrealised return.
The realised return is negative because the Crown had, at that point, invested $1,042 million in Air New Zealand and had received $601 million in cash. Taking into account the nearly 13 years since the initial investment, and the timing of the dividend payments, gives you the -7.9% per annum realised return.
Then on 20 November 2013 the Crown sold some of its shares. That changed the figures into this:
| Date | $m | |
|---|---|---|
| Initial investment | January 2002 | (892.2) |
| Rights issue | December 2004 | (149.3) |
| Dividends received | December 2002 to 20 Nov 2013 | 601.0 |
| Selldown proceeds | 20 November 2013 | 365.2 |
| Value of shareholding | 20 November 2013 | 961.7 |
| Net total | 886.4 |
The first thing to notice is that the net total is the same as it was before: $886.4 million. So, the IRR calculation gives the same result – a return to the Crown of 6.6% per year. The sell down of 221 million shares had no impact on the Crown's return on its investment.
This is not surprising.
On 19 November 2013, the Crown had around 804 million shares in Air New Zealand, and with the market share price being $1.65, the theoretical market value of those shares was $1,326.9 million.
On 20 November, the Crown had around 583 million shares in Air New Zealand worth $961.7 million and $365.2 million of cash. This adds up to exactly $1,326.9 million, because the Crown had sold its shares for the market price of $1.65.
So the Crown had exchanged 221 million shares, with a theoretical value of $365.2 million, for $365.2 million of actual cash. And of course this means there was no impact on the IRR, because there was no gain or loss of value.
There was however a significant impact on the Crown's realised and unrealised returns:
|
|
19 November 2013 | 20 November 2013 |
| Realised return | (7.9%) | (0.9%) |
| Unrealised return | 14.5% | 7.5% |
| Total return | 6.6% | 6.6% |
By selling some of its shares, the Crown had converted some of the total return from an unrealised return (reflected in the market value of its shareholding) into realised return (reflected in cash paid to the Crown).
As discussed in the previous blog post, an unrealised return can change over time, in this case as Air New Zealand's share price changes. Unrealised return is therefore “at risk” while realised return, cash in the hand, is not.
Conclusion
So when the Crown reduced its shareholding in Air New Zealand from 73% to 53%, by selling shares at the market price, it didn't gain or lose any value from the transaction. Instead it reduced its exposure to the risks[1] of Air New Zealand's future financial performance (as reflected by changes in its share price).
But hasn't the share price increased since then?
Yes. Air New Zealand's share price on 9 May 2016 was $2.30. This is 39% higher than the price the Crown sold some of its shares for.
So does this mean the Crown lost money by selling some of its shares?
Not really. It's true that if the Crown hadn't sold any shares in Air New Zealand in November 2013, the IRR on its investment would now be slightly higher: specifically, it would be 8.9% rather than 8.4%.
That (hypothetical) IRR of 8.9% would consist of a -0.8% realised return (from dividends) and a 9.7% unrealised return (from the value of the Crown's shareholding in Air New Zealand at the market share price on 9 May 2016).
But we only know the IRR would be higher with the benefit of hindsight. In November 2013, the market price for Air New Zealand's shares was $1.65 – the price the Crown sold at. The Crown had no more information on Air New Zealand than the market did. So the Crown had no reason to believe that Air New Zealand's share price wasn't the fair market price, taking into account everything that was known at the time, and the risk of investing in the company.
In fact, one of the reasons that Air New Zealand's share price has increased since November 2013 has been the fall in world oil prices, which was unexpected.
Notes
- [1] Of course risks can be positive or negative – Air New Zealand's share price going up is a positive risk for a shareholder.
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