In an attempt to find a non-ideological ground to justify opposing the Government’s buyback of the rail system, John Key and others have been claiming that the $665 million price-tag is â€˜over the odds’ and $200 million in excess of Toll’s â€˜book value’ for the assets bought. What do these two terms mean and what do they say about the value of the buyback?
Book value is ‘The value at which an asset is carried on a balance sheet. In other words, the cost of an asset minus accumulated depreciation.’ So, in the case of Toll, the book value is what you would get for the trains and wagons if you sold them individually. It is not the value of the company as a going concern. A company is usually worth a lot more than the mere saleable value of its assets. After all, the company is not just in the business of selling its assets; it is in the business of doing things with those assets to generate a profit. Telecom, for example, has a book value of $3.6 billion, if it sold of all the stuff it owns it thinks it would get $3.6 billion but Telecom is worth more than the sum of it’s parts: if you wanted to buy all 1.8 billion Telecom shares today it would cost you $7 billion.
The Government is getting more than just trains from Toll it is getting a working, profitable company, with an organisation, existing customers and suppliers, contracts, and staff. You determine the value of a company by looking at the present value its expected future profits (and any other gains that may come to you through owning the company). Book value is simply not a relevant to that calculation. John Key knows that, he’s the moneyman, remember, but he’s hoping you don’t.
Search google for â€˜over the odds’ and the first references you find are to gambling but it’s also used in a related activity currency speculation. When Mr Key was a currency speculator his job was to estimate the odds of a currency trade being a certain value at a certain time. If a currency speculator pays more for a currency trade than is justified even if currency moves as hoped, then they pay above the odds just like a bet on a horse that costs more than you get back if you win the bet. Again, that has nothing to do with the book value of the rail stock and nothing to do with the price one should pay for a company, it is a gambler’s/currency speculator’s term.
And again, slippery John is hoping you will be wowed by the fancy-sounding language and not look at what he’s saying actually means. Because, as so often, what he is saying actually means nothing.
[PS. The Right is now trying to make a deal over a $200 million loan that the Government may be getting as part of the rail company. No information is available on whether the loan will actually be part of the deal and the interest-rate on it (the value of any loan depends on it’s interest), so it’s impossible to say what it costs. Moreover, most companies hold debt, it’s part of business, and the rail was a profitable operation even with this debt, so it does not change the logic of the deal. More hollow arguments that prey on ignorance.]