Instos shunted from the QR moneytrain

The Queensland government's QR National sell-down has not pleased everybody, but in a way that was how it needed to be.

Australian institutions were, and largely still are, about $1 billion underweight the company despite its obvious potential for growth, because they were waiting for the State Government to disgorge some or all of its 33 per cent stake.

I mean, what's the use of an overhang if it doesn't hang over and provide an opportunity to get cheap stock? The instos were naturally waiting to take the government to the cleaners when it was forced to sell because of the state's $62 billion in debt, rising to $85 billion.

Then in late August came part one of what looks like a double play.

QR National announced a 52 per cent lift in EBIT, a more than doubling of the dividend and an on-market buyback of 10 per cent of the capital. The stock promptly went to $3.60, up from its 2010 listing at $2.55, before sagging back to $3.40 because of the fall in coal and iron ore prices and then closing on Friday at $3.47.

And then this morning, half the government's stake gets sold for $3.47, Friday's closing price… but not to the institutions! Aaargh – they missed out! What's more the overhang has now gone and the new buyers are long term investors.

The 432 million QR National shares are going to just four parties as I understand it: the company itself buying back 288 million for $1 billion, a sovereign welfare fund and two others, one local and foreign, buying another 144 million for $500 million. No book build, no on-market buyback.

It appears that group approached the government some time ago, not the other way around, and the rest of the institutions have been left gasping for air – still underweight and scrambling for stock. As a result the price quickly shot up to $3.64 this morning.

In any case, this is a good result for both the company and the government.

For the government, Treasurer Tim Nicholls gets to spruik that he got 36 per cent more for this parcel than the initial IPO and retires $1.5 billion in debt, and the company is able to have a selective buyback instead of an on-market one, thus leaving institutions underweight. The price is likely to keep rising now.

That's because they can't wait for the rest of the government's stake to come onto the market. It might take a while, and in the meantime there's a risk the QRN price will move higher on the back of a shortage of stock, a strong balance sheet and the potential of a lot of cost reduction with the government down 16 per cent.

Meanwhile, the company gets to tighten its sloppy gearing slightly while largely removing the overhang. All good.

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