THE DISTILLERY: QR coup

One jotter explains the "genius" of Tim Nicholls $1.5bn sale, while others outline the winners and losers.

The Queensland government managed to sell a shedload of QR National stock at the price the coal haulage company closed at on Friday. How is that possible? Australia’s business commentators run through the $1.5 billion coup played by Queensland Treasurer Tim Nicholls, with the assistance of investment banks UBS and Rothschild.

The Australian’s John Durie writes that the "genius” of the Queensland government’s sale was its exploitation of the market’s "herd mentality”.

"With restrictions on the sale of the Queensland government shares lifted at the end of August, the market was trading in expectation of a large block sale, which meant hedge funds could short the stock with immunity, and big fund managers could do what they do best and sit on their hands. QRN was trading as low as $3.07 a share in late July on the speculation the government would sell a chunk of its 34 per cent stake in the rail company to pay down its debt. The new government, of course, had allowed itself the right to sell down holdings in some assets while maintaining the moral high ground by pledging no major new privatisations without first going to an election. Treasurer Tim Nicholls deserves praise for this deal and he will deserve even more when he sells the final 16 per cent government stake in the company.”

Business Spectator’s Alan Kohler explains with a certain degree of cheek that this column adores, why institutional investors went into the QR share sale about $1 billion underweight.

"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 Australian Financial Review’s Chanticleer columnist Tony Boyd explains how investment bank UBS saw the problem coming for Nicholls a mile down the road.

"UBS convinced Nicholls that he was in danger of selling the stock short given the latent demand because most domestic fund managers were underweight the QRN index position. The government had two choices. It could have opted for the expensive and uncertain route of issuing a full offer document and selling its entire $3 billion holding of shares to retail and institutional investors. This option would have exposed the government to great risks because it would have taken at least three months and possibly longer. It would have traversed the Christmas holiday period and may have required a new set of accounts for the half-year to December. The second and cleaner option was the block trade.”

This is but a taste of Boyd’s piece that is awesomely detailed and complicated.

Meanwhile, Fairfax’s Elizabeth Knight poses the most obvious question that if the Queensland government believes there is any growth left in QR stock, then why sell half of that 34 per cent stake?

"The first point is that the government argues that the shares had been borrowed against by the previous Bligh regime. Nicholls said yesterday that interest costs on the debt exceeded the contribution from QR National's dividends. But that isn't an iron-clad reason to sell an asset that is appreciating in value. The second possibility is that Newman said in his electioneering that QR National would be sold – an undertaking that was made possible in August when the government's 34 per cent was released from escrow. The $1.5 billion proceeds allows the government this each-way bet. If the mining boom does continue to slow as it has over the past couple of months the decision not to sell the lot is one that Newman's government may live to regret. The trouble is that neither Newman, the QR National management nor the investors that will buy the stock have any idea how the resources industry will look even in a couple of months.”

Elsewhere, The Australian Financial Review’s Jennifer Hewett points out that the listeners of Alan Jones have already largely forgiven the shock jock for his remark about the prime minister’s father dying of shame.

The Australian Financial Review’s Matthew Stevens writes that the Commonwealth government’s submission to the Australian Competition and Consumer Commission (ACCC) is a "fairly official stamp of endorsement for the planned alliance between Qantas and Emirates”.

And last but not least, Fairfax’s Adele Ferguson understands that the final report from the Productivity Commission detailing how default superannuation funds should be selected is in the hands of Minister for Financial Services, Bill Shorten.