Can Infratil repeat the Z magic with Vodafone?
Infratil bought Shell's New Zealand assets and transformed them into Z Energy, quintupling its money and floating the rebranded group onto the NZX early. Bernard Hickey looks at whether it can repeat the formula with Vodafone New Zealand and leapfrog a resurgent Spark.
Anyone who has worked in corporate life in New Zealand for an internationally-owned company knows the feeling.
You're trying to compete with a faster-moving and more nimble locally-owned competitor, but you just can't get quick decisions or any commitment to invest both capital and executive attention for a longer term future in New Zealand.
Ask anyone working for many of our major overseas-owned banks, insurers, media companies and fuel companies to explain what corporate life is like and you'll hear an off-the-record litany of sighs. They bemoan the missed or middle-of-the-night conference calls, interminable waits for board decisions, long-distance second guessing of corporate politics and constant calls for more cash dividends to prop up or satiate the demands of investors somewhere else.
Often, these foreign-owned companies have dominant market shares because they were once locally or state-owned companies that were bought because of their strong market position and cash-generating ability, but they are then neglected and struggle to compete when a locally-owned upstart comes along or an existing local player revives itself. They essentially milked for cash, forced to adopt global strategies that don't work in New Zealand and are often unloved and neglected.
But these companies also offer opportunities for local companies with the cash to buy these assets back and revitalise them at a time when their globally-driven parents either lose interest or are forced to sell by necessity or a change of strategy.
The model is the Infratil-NZ Super Fund acquisition of Shell's New Zealand fuel retailing and distribution assets in 2010 for $696.5 million. The New Zealand investors funded the deal with $420 million in their own equity and then loaded Z Energy up with $430 million in debt by the time they floated Z Energy in mid-2013 to pay for the rest and extract early dividends. All up, with dividends and share sales, these two New Zealand investors received over $2 billion in proceeds over six years from investing an initial $420 million.
The deal of the century
It was the deal of this century for Infratil shareholders and, ultimately, all New Zealand taxpayers because of the involvement of the NZ Super Fund. The timing was immaculate, given Shell was ditching non-core assets to cut debt right at the trough of asset values after the Global Financial Crisis. The execution of the turn-around of Shell's service station and fuel distribution network here in New Zealand was impeccable.
Infratil and the NZ Super Fund appointed an avowedly nationalist management team that played up the New Zealand ownership of Shell New Zealand and successfully rebranded it as Z Energy. They then reinvested capital in improving creaky and sometimes dangerous infrastructure and most importantly, helped engineer a doubling in industry profit margins. Z Energy invested in its stations, resisted discounting to win big customers and has squeezed margins higher in areas with less competition, such as Wellington and the South Island (which do not have Gull). See more on Z Energy's role in higher industry profit margins here in my piece from December 2018.
The revitalised Z Energy went on to buy Caltex's service stations and become a major player on the NZX, and one of the most trusted consumer brands.
Along with Trade Me, Air New Zealand and Whittakers, Z Energy has been the major local consumer brand and financial success story of the last 20 years.
Can the same be done for Vodafone New Zealand?
The deal announced this week to bring ownership of Vodafone New Zealand assets back into local hands looks almost a carbon copy.
Infratil teamed up with the Canadian-headquartered private equity investor Brookfield Asset Management to buy Vodafone New Zealand from Vodafone Plc for $3.4 billion. Again, the deal is largely being funded with debt, thanks in part to increasingly low long-term interest rates globally. Infratil is borrowing $629 million on its own balance sheet and loading over $1.3 billion onto Vodafone New Zealand's new balance sheet.
There's nothing like leverage to accelerate the growth of equity and Infratil is hoping Vodafone New Zealand can quickly ramp up its bottom line with a combination of renewing revenue growth and increasing profit margins.
Is Jason Paris the Mike Bennetts of the telco sector?
Infratil CEO Marko Bogoievski and Vodafone CEO Jason Paris were quick to highlight both the similarities and the differences between Z Energy and Vodafone New Zealand in announcing the deal.
Bogoievski pointed to the constraints the London-based Vodafone had put on its New Zealand arm, and the distractions it had faced over the last couple of years with firstly a failed merger attempt with Sky TV, and then a fast push for an NZX float next year.
Some local units of global companies "suffer from a lack of investment and could respond to a bit of love," he told analysts on a conference call.
Paris welcomed the change of ownership as allowing local management to focus 100 percent on New Zealand and think longer term than the three months quarterly reports demanded by London. He also pointed out Vodafone had plenty of work to improve customer service, saying it was only 80 percent there and could do much better at reducing its churn rate and providing more products to existing customers, rather than chasing new customers.
He hinted at the distractions and the handcuffs of global policies, saying Vodafone had been 12 months late to the local market with an unlimited data offer in mobile and had not been able to aggressively offer fixed wireless access as an alternative to fixed broadband because of Vodafone Plc's opposition.
Paris said he would now aggressively expand Vodafone's share of fixed wireless. He pointed to his own success when at Spark in lifting its share of that market from 10 percent to 15 percent inside a year.
Higher prices? Shared infrastructure?
Both Paris and Bogoievski also pointed to the potential for an industry-wide improvement in profit margins by better use of shared infrastructure and by players pushing to a market where customers paid "more for more" rather than "less for more."
Bogoievski suggested Vodafone and Spark could look to share mobile networks to avoid duplication. He did not confirm suggestions of a shared 5G network, but said:
"Ultimately, it goes to more sensible structures for network sharing or wholesale arrangements or future industry structure, where the industry is sensible about bringing forward the benefits of new technology spend for Kiwis as soon as possible but avoids duplicating and creating redundancy in the national infrastructure."
He pointed to the shared use of a network for rural broadband.
"For a long time both network operators thought they were competing on network differentiation as well as products and services. Our personal view is that there’s essentially equivalence now, particularly in Spark and Vodafone’s network, and that creates an opportunity for a different conversation where you compete vigorously at retail, but you share essential components at network level," he said.
“If we want to be a leader we should be starting that conversation.”
The exceptions to the rule
However, there are differences. Infratil said it planned to be a long term holder of Vodafone and Paris said he expected to keep the Vodafone brand.
Although it's worth noting Infratil also said it planned to hold on to Z Energy for the long term when it bought it in 2010, but was so successful in ramping up its profitability and value that it was floated within three years, which may give investors hoping to get their hands on Vodafone NZ shares next year some hope.
A shared history
Bogoievski and Paris have no shortage of experience in the industry, or knowledge of Vodafone's main competitor, Spark.
Bogoievski was the CFO of Spark's predecessor Telecom when Theresa Gattung was CEO in the early 2000s. Paris was a key Spark executive for seven years when it rebranded from Telecom to Spark (after regulators forced the split of Telecom into Spark and Chorus).
During that time he helped CEO Simon Moutter restructure Telecom and refocus it on better customer service and using technology better to compete against both Vodafone and network operator Chorus.
Infratil also has no shortage of experience in the sector. It owns a 51 percent of Trustpower, which is mostly a power generator. But it has built a five percent share in broadband by bundling broadband with power to retail customers.
This is one potential wrinkle in the deal if the Commerce Commission sees it as a potential market concentration. The deal signed this week specifies that Infratil either sells its Trustpower stake or drops the Vodafone deal if the Commerce Commission doesn't grant clearance.