Unwinding the Helicopters NZ transaction: an analysis

With the news that both Helicopters NZ and Scales Corp shares have been sold, South Canterbury Finance's Feb 2010 acquisition has been fully unwound. This presents an opportunity to evaluate the amounts realised as compared to the related party transaction value, and the impact on the pre-existing loan and exposure to Southbury Group and Southbury Corp.

To get started with the analysis requires a measure of the fish-hooks in the Helicopters NZ sale. I have this from a confidential source I'll not name who got it from Goldman Sachs: $145.3m. This figure was the 'net debt', being cash less borrowings, that were excluded from the deal. The borrowings included loans from SCF as well as third party borrowings (e.g. UDC).

The total proceeds were:
Helicopters NZ $160m
Scales Corp shares $44m
Total $204m

Subtracting the value of the 'net debt' excluded from Helicopters NZ and the $20m of preference shares SCF held in Helicopters NZ gives net proceeds of $38.7m. This can be compared to the $162.5m in value ascribed to the assets when they were acquired by SCF.

Here's where it gets a bit tricky in analysing the Feb 2010 acquisition transaction: if the assets are not valued at $162.5m but at their realised value of $38.7m, it makes Southbury Corp and Southbury Group insolvent and the $77.2m loan from SCF impaired. I've added a couple more columns to my spreadsheet showing what happens when realisation values are used, see here. Whether the transaction took place or not, this money was gone at these asset values. So what's the difference between the transaction happening, and it not happening? The answer is:

1. The $10m paid for the assets would have been saved, and
2. The $15.6m third party debts of Southbury Corp would have absorbed up to $3.9m in losses, saving SCF this amount
   

This analysis comes from comparing the actual realisation with the same realisation by Southbury Corp, see here for the details.

The conclusion of the analysis is that, should the values attributed to the assets not be recovered, the transaction cost SCF $13.9m rather than providing benefits of $11.8m I calculated in June 2010 using the higher values. Officials do not appear to have assessed the transaction fully: no consideration was paid to the recoverability of the loan and other exposures to Southbury Group and Southbury Corp, or the impact of lower recoverable values on the assets acquired. For all the insight and foresight Treasury displayed during this episode, they swallowed this deal hook-line and sinker. They booked $150m in benefits from the transaction that resulted in additional losses of $13.9m.