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On July 7, New Zealand Finance Minister Michael Cullen announced the New Zealand government had negotiated a joint agreement with Australia's Toll Holdings Ltd. to operate Tranz Rail Holdings Ltd., New Zealand's 2,400-mile multi-modal freight transportation company — a deal that came as a surprise to Tranz Rail's board, which earlier in the day had conditionally blessed a Toll deal of its own.



"The government's aim has always been to secure rail as a vital piece of infrastructure in the national interest. This ensures we will achieve that if Toll acquires Tranz Rail," Cullen said in a prepared statement.



Under the terms of the "Heads of Agreement" (HoA) deal, the New Zealand government would regain ownership of the track for 60 cents (or $1 New Zealand dollar), and both parties would commit to rebuilding the rail network should Toll succeed in its 57-cent-per-share takeover bid for Tranz Rail.



Under the HoA, a new Crown corporation — TrackCo — would be set up to maintain and control the track; TrackCo would charge Toll for track use. For the deal's first five years, the charge would reflect TrackCo's operating costs; subsequent charges also would reflect capital costs.



Also, Toll would appoint the TrackCo director and have exclusive access to the network for freight services, subject to "transparent key performance indicators" with a bonus and penalty regime, Cullen said. The New Zealand government would have "step-in" rights if volumes on a line slip below 70 percent of current usage.



New Zealand would invest $120 million to upgrade the rail network — $60 million upfront and about $15 million a year over four years. The government also would provide incentives to encourage Toll to shift freight from road to rail. Meanwhile, Toll would invest $120 million in rolling stock. The transaction would be "revenue neutral" for New Zealand, Cullen said.



"Before we went public with the HoA ... I warned Toll that they were on a collision course with us and instructed my officials to suggest a joint approach under which the Crown would get the track and Toll the operating company," Cullen said. "They rejected the offer at that stage on the basis that they wanted the track, too. I am pleased that they have since reconsidered that decision."



The most significant difference between the government's HoA with Toll and its HoA with Tranz Rail was that the Tranz Rail agreement committed the government to taking a 35 percent equity stake in Tranz Rail at a cost of $45.3 million, Cullen said.



"Should Toll's acquisition bid fail, the Crown's HoA with Tranz Rail remains alive and will be referred for approval to Tranz Rail shareholders," Cullen said.



Earlier on July 7, Tranz Rail Holdings Ltd.'s board announced that it, too, had reached a conditional agreement with Toll, but that "significant negotiations yet to be concluded," citing in particular the need to resolve the "uncertain outcomes of the track access charge."



Then, after Cullen issued his statement, the board said it was "surprised by the terms of a new joint agreement announced this afternoon between the government and Toll Holdings," adding that Chairman Wayne Walden would evaluate the latest announcement overnight and make no further comment."