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Mythbusting: ‘Book value’ & ‘over the odds’

Written By: - Date published: 10:14 am, May 12th, 2008 - 32 comments
Categories: assets, john key, slippery - Tags:

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 ‘over the odds’ and $200 million in excess of Toll’s ‘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 ‘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.]

32 comments on “Mythbusting: ‘Book value’ & ‘over the odds’ ”

  1. mike 1

    Looks like the 665m is now 885m.
    Paul Henry had Clark squirming this morning when she said she had no knowledge of the extra 200m.
    Quite an expensive election bribe that just might as Henry says bite them in the arrrse.

  2. higherstandard 2

    If you want a run down on examples of politicians saying nothing I recommend the following link when you have 10 minutes to spare.


  3. higherstandard 3

    Mike if true it’s a sad commentary on the people that are negotiating these contracts for the government

  4. So Helen has no knowledge of the extra 200 million?, perhaps she is just confused.

  5. AncientGeek 5

    Steve: you forgot to mention the existing customer relationships. When companies are sold that is usually the biggest asset. After all that is where you make money from.

    Book value is the absolute worst case. It is what you should be able to get if you just sell the assets. In most cases the client lists on their own even for dead companies are often worth more than the assets.

    That isn’t the case here. We’re talking about a running profitable company. Buying it is a strategic decision based on future transport needs in a higher energy cost environment.

    To put it mildly the nats are shading the truth by performing the lie of omission in their criticism. From where I’m looking it looks like a relative bargain for the state. But of course Toll had this wee weak point – they haven’t been paying their rent.

  6. see my PS above regarding this supposed loan.

    Like book value, net financial assets (savings minus loans) has little to do with the value of a company. What matters is the present value of expected future gains (both profits from the company itself and other benefits accuring to the owner) – book value and financial assets only inform those projections, they are not in themselves ways of measuring the value of a business operation.

  7. AncientGeek, right you are, I mentioned contracts but existing relationships should be there –

    it is the fact that a company has people who come and buy what it sells that makes it worth owning, not the assets it uses in the process

  8. AncientGeek 8

    I’d guess that the government will be putting TranzRail in as a part of the successful SOE model. That has proved to be quite effective in producing profitable enterprises once the capital expenditures have been done. Less opportunity for politicians to screw around with the management.

    It has proved to be an effective model. The state as a shareholder is able to inject funds for longer term investments than the market is capable of recognizing. Fits the role of government in developing infrastructure.

  9. AncientGeek 9


    If you want a run down on examples of politicians saying nothing I recommend the following link when you have 10 minutes to spare.

    Excellent link.

    I was trying to pick JK’s favorite strategy for dodging awkward questions as he isn’t represented in the collection of quotes.

    I think it is number four – the Smother Tackle. Say something that sounds good, but actually says zilch. I loved this one from Shipley during the start phase of East Timor…

    Is it likely that the defence forces will be put on a 24 or 48 hour alert within days?

    We have a 24 hour alert for the C130s that may be required to evacuate people out of Dili. They are already on 24 hour alert, these are the people associated with the two aircraft and if they are required they are in a position to go at any time. If we are required to join a force we can bring the timing down depending on the request. I don’t want to commit to a 24 hour because I have not discussed the wider allocation of troops on that time basis at this stage. What I can tell you is that New Zealand has been preparing for some months to see that we not only have the people but also the equipment ready to make a contribution in this area

    As the writer says:-

    Extraordinary. Notice that the answer to that question was, “I don’t know’.

    That sounds like John Keys favorite technique – saying nothing nicely.

  10. r0b 10

    Thanks for this post Steve, very useful to have posts like this on the languages of economics and accounting. In fact, very useful to have “educational” posts in general on how stuff works (could be completely debate / policy free).

  11. randal 11

    you should have been here on monday…matthew hooton on RNZ this morning was just plain bad tempered…he knows he is going to loose!

  12. Billy 12

    “Moreover, most companies hold debt, it’s part of business…”

    But it’s not usual in a situation like this for the purchaser to buy the company. You would expect it to buy the assets and leave the vendor to clear up the debt.

  13. Santi 13

    As a Toll shareholder I must congratulate that “sucker” Michael Cullen for the premium price he paid. It could’ve been higher, but I’m not complaining.

    Ah, the beauty of having a socialist government adding thousands of dollars to my personal wealth.

  14. Billy 14

    “…he knows he is going to loose.”

    Are you sure you went to university, randal?

  15. Tane 15

    Ah, the beauty of having a socialist government adding thousands of dollars to my personal wealth.

    We can confiscate it if you prefer, but that’s generally frowned upon by the right.

  16. Santi – you’re not kidding anyone about your personal wealth as you are clearly too dumb to count to 100 let alone accrue significant capital. Oddly that’s why I’ve never understood your rightwing sentiments as it’s the left that are ideologically inclined to helping out disadvantaged types such as yourself…

  17. higherstandard 17


    Apparent stupidity is no barrier to accruing wealth and power the current leader of the USA is a fairly good example.

  18. Phil 18

    A couple of points…

    Steve says;
    “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. ”

    1)The single most profitable component of the enterprise group – the road freight business – remains in private hands.
    2)Part of the agreement includes Toll recieving significant ongoing benefit in discounted rent and other operating expenses; yet more lost revenue to the government.

  19. Noone’s denying those are costs that are part of the deal, Phil, (and if they weren’t the cash price would be higher) but you’ll agree book value is just a distraction in this debate- you can’t say ‘Toll’s book value was $400 million, they paid $665 million, therefore they paid $265 million too much’ because that’s simply not how you value a business.

    captcha: ‘$7,388,099,416 eases’. Yup, I bet it eases a lot.

  20. higherstandard 20

    For those with a wish to learn more on valuing a company.


  21. ghostwhowalks 21

    Sure Toll gets a benefit with ‘cheap rent’ but they would likely have an obligation in return to use rail for the truck business where possible. Toll trucking would say have a contract to deleiver beer from an Aucckland brewery to the SI. And they would use rail for most of the journey.

    As for the mystery $200 million, Where is the need for government funding to repay this. Toll Rail is a profitable business and it would be normal to have debt on its books and pay interest. This wouldnt be from the taxpayers account.

    I see a concerted effort to blight this buyback based on dubious reporting, they know the public likes it but want to wear down that support by a BRL agit prop campaign.

    AS for the Aussies, who where the ones about to sell of Qantas cheaply to an overseas consortium. One very small fund trader dug his heels in over the poor deal and it just failed to get shareholder approval ( in spite of bending the rules). That fund trader no longer has a job, BTW

  22. j 22

    Not really familar with Toll but didn’t the govnt pay them a subsidy to operate. If they were paid a subsidy then could the rail operation really be described as profitable.

    If you could normalize the earnings by adding back capital expenditure (which apprently they skimped on) and subtracting the govnt we would have a better idea of the true value based on a discounted cashflow basis.

    Congrats to toll shareholders on getting a 4% rise on the day of the sale. The market knows who won on the day.

  23. ghostwhowalks 23

    j the ‘market’ is a way of getting a price not a crystal ball. Thats why so many companies went private ( while the credit boom lasted) since the ‘market’ undervalued them.

    But in answer to your question Toll was to pay Govt (Ontrack) a price to run the trains ( which are leased) on the tracks which the govt had bought previously for $1.

  24. This isn’t much of a business, it couldn’t pay one of its core costs in full (track access charges). Nobody can pretend this is a viable going concern. Parts of it are, but the government was unwilling to make Toll – a monopoly operator of the rails the state owns – to pay what it owed it. The government regularly calls in debt collectors to truck companies to recover unpaid Road User Charges using its (and local authority) roads.

    Again it’s such a great deal, nobody else bought it. It is purely ideological to treat rail as deserving of a subsidy road does not get. A better answer would be to charge trucks differentially by route (reflecting differing road costs), but then that’s harder to sell to the public – but would address the “are rail and road treated the same” argument.

  25. Luke C 25

    Trucks clearly do not pay the full cost of operating on the roads.
    They cause all the road damage (1 truck = 10,000 cars), and necessitate the need for many of the road improvements such as grade easements and passing lanes.
    Toll could have paid the access charges and the business would have survived. However certain lines such as Napier – Gisborne, Northland, and maybe parts of BOP would have closed which would have been unacceptable. Once lines are closed they can degrade quickly, and to put them back into service in a decade would be very expensive.
    These lines may not be uneconomic currently, however they all have good future prospects from forestry and other freight.
    Looking at Napier Gisborne, the road is terrible and 100’s of millions could be spent on it and it would still be poor. Therefore it makes good sense for the govt to slightly subsidise the operation of the railway to keep the trucks off the road, and keep the road safe for cars.

  26. Pascal's bookie 26

    Looking at Napier Gisborne, the road is terrible and 100’s of millions could be spent on it and it would still be poor. Therefore it makes good sense for the govt to slightly subsidise the operation of the railway to keep the trucks off the road, and keep the road safe for cars.

    Exactly right. It’s pragmatism. The only reasons not to are the normative ideological belief that govt. should only be in the business of locking people up and shooting foreigners, and the more mystical belief that govts cannot operate efficiently in the market place, due to their invisible government germs.

  27. Phil 27

    “They cause all the road damage (1 truck = 10,000 cars)…”

    I’ve heard this line repeatedly from the pro-rail side of the argument for a while now, but I have never seen any evidence to support it. Where does this claim come from?

    “… and necessitate the need for many of the road improvements such as grade easements and passing lanes ”

    Sure, because without trucks on the road there wouldn’t be any need what-so-ever for passing lanes or better road design. None at all, nada, zip, zilch…
    Go find a dictionary and look up “scapegoat”

  28. Pascal's bookie 28

    ” and necessitate the need for many of the road improvements such as grade easements and passing lanes ‘

    “Sure, because without trucks on the road there wouldn’t be any need what-so-ever for passing lanes or better road design. None at all…”

    When you double checked the definition of scapegoat Phil, did you notice one of the def’s for ‘Strawman’ a few pages later…

  29. Higherstandard 29

    Is there significant amounts of freight traffic between Napier and Gisborne ?

  30. j 30

    “j the ‘market’ is a way of getting a price not a crystal ball. Thats why so many companies went private ( while the credit boom lasted) since the ‘market’ undervalued them.”

    Not true at all. Companies went private during the credit boom because it was cheaper to replace equity with debt because the cost of capital of debt is lower than that of equity, and leverage them up and allow the equity holders to cashout through share buybacks, special dividends and IPOs. The private equity boom was simply another form of the leverage buyout.

    Markets are sometimes wrong or right but I didn’t see a whole lot of other companies bidding for the railway assets. If it is a profitable enterprise and given the worldwide mania about infrastructure I would have to say that the lack of competitors indicates that toll reeled their bondy in.

  31. Luke C 31

    “One 80,000-pound (36 tonnes) truck may do as much wear-and-tear damage to a highway as 9,600 passenger vehicles.”
    Note that NZ allows 44 tonne trucks.
    If have done a few papers in road engineering and you learn that when designing roads you only take into account the number of trucks using the road, because the damge caused by cars is so insignificant.
    Something to do with the fourth power being taken of the weight of the truck when calculating damage.

  32. Matthew Pilott 32

    HS – I couldn’t say, but off the top of my head I’m not sure how else stuff gets to and from Gisborne. Apart from boat, but I haven’t heard much of Gisborne’s port.

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