UPDATE 3-NZ law change set to scupper Auckland Airport bid

(Adds airport comment, updates share price)

By Adrian Bathgate

WELLINGTON, March 4 (Reuters) - A NZ$1.8 billion ($1.4 billion) bid by a Canadian pension fund for a stake in Auckland International Airport Ltd (AIA.NZ) looks destined to fail after the New Zealand government moved to tighten rules for overseas ownership of strategic assets.

Shares in Auckland Airport, the operator of New Zealand's main international gateway, fell as much as 20 percent to a 17-month low of NZ$1.99. It last traded at NZ$2.20 -- 40 percent below the NZ$3.6555 per share offer price.

The tighter investment rules are a second blow to the bid in the past week, and cast doubt on the airport's stated desire to see a cornerstone shareholder on its register.

While the Canadian Pension Plan Investment Board (CPPIB) said it would go ahead with the offer for a 40 percent stake in the airport, analysts said investors saw it as a lost cause.

"Clearly the market is saying it doesn't believe this particular deal is going to go through," said Arthur Lim, investment director at Macquarie.

Under changes announced late on Monday, ministers considering whether to allow foreign control of a strategic asset will have to take account of a broader range of factors than previously, including the issue of local control.

On Feb. 25, the government moved to give stapled securities, or shares that include a debt element, the same tax treatment as ordinary shares, preventing companies from making tax deductible payments.

The CPPIB had planned to issue stapled securities as part of a restructuring plan for the airport should its bid succeed.

Auckland Airport Chairman Tony Frankham told Reuters the fact that regulations were changed a week before the offer closed "contains some sort of message" as to whether the government would approve the deal.

The airport has previously said that regardless of the outcome of the CPPIB bid it wanted to attract a cornerstone shareholder, something it may now struggle to do.

"The duality of the stapled securities shift and the change in the regulation means that an offshore shareholder would have many more hurdles than existed before," Frankham said.

Finance Minister Michael Cullen said the tighter regulations were in response to widespread public concern over the CPPIB bid.

"It does make life more difficult for the Canadian Pension Board bid," Cullen told Radio New Zealand, adding that approval for the bid was not necessarily out of the question. He said the government was not opposed to foreign investment and the changes brought New Zealand into line with countries such as Australia in protecting nationally strategic assets.

CPPIB President Graeme Bevans said the fund would continue the bid as it had always been aware the airport was a strategic asset of national importance.