The country's 14 ports, transport sector and shipping lines have waited years for some form of rationalisation to begin in the oversupplied sector.
The merger proposal announced in October was the first formal step in that direction and is being eagerly watched.
Research by broking house ABN Amro Craigs has tallied up both sides of the ledger on the proposed merger, looking at listed LPC, whose 78% shareholder is the Christchurch City Council, through its subsidiary Christchurch City Holdings Ltd (CCHL), and Port Otago, which is wholly owned by the Otago Regional Council.
If the ports are paired across the boardroom, savings could be made in several areas, including staffing, administration, and capital expenditure.
It could avoid doubling up on the same services to compete for shipping lines which are sending fewer but larger vessels to New Zealand.
ABN broker Peter McIntyre said because the earnings before interest, tax, depreciation and amortisation between the two companies were so different, with LPC at $30.9 million and Port Otago at $21 million, the merged entity would owe CCHL $90 million, when a capitalisation rate applied.
He said an initial $30 million could be paid to CCHL by way of a dividend, and the $60 million balance over a period.
"The two ports could have equal voting rights but different economic interests until such time as the balance of $60 million is paid.
"That could be through annual or special dividends, subject to the operating performance and target gearing [debt] of the merged port," Mr McIntyre said.
Both port companies are in agreement they would continue to own their respective infrastructure and land assets.
To forestall any parochial concerns, Mr McIntyre believed the port companies would have a 50-50 merger ratio.
The ABN research has removed Port Otago's Chalmers Properties Ltd subsidiary from the equation, as it is not part of its core business, but it has nevertheless been a significant contributor to Port Otago's bottom line during the past four years.
Chalmers Properties' commercial portfolio of property and vacant land is based 56% in Dunedin holdings, 32% in Auckland and 12% in Hamilton.
In September, Port Otago delivered an inaugural special dividend of $2.5 million to the ORC, plus an annual dividend of $7 million.
Overall, its profit for the year was down almost 30% from $39.3 million to $27.8 million.
That included an unrealised revaluation of Chalmers Properties of $17.9 million - if those assets were sold.
The revaluations lopped $7 million off Chalmers' previous profit; down to $21.7 million.
Port Otago has clearly signalled Chalmers' investments would not continue to rise and might even partially reverse.
In late-November, the Christchurch council further looked to strengthen its position, and eliminate minority shareholder positions, after it made a $2.75 share offer, staying below the Takeover Code rule that it cannot acquire more than 5% of shares a year.
Following the stand in the market, CCHL has 78.16% of LPC shares and the Port Otago blocking stake at 15.47% remains unchanged, since it grabbed the stock in 2006.
Mr McIntyre described CCHL's $2.75c offer as "fair" and attractive for shareholders, and ABN has maintained a "buy" recommendation on the stock.
However, he added a caution, in that he believes CCHL will continue to increase its shareholding by slowly "creeping" .
"We would advise shareholders selling in any subsequent stand in the market to ensure an escalation clause applies, to ensure they get a part of any higher, subsequent offer," he said.
Since the October merger announcement, the port companies have appointed some directors and their respective chief executives to talk about the issues, in conjunction with Auckland-based investment advisers Antipodes, but have otherwise remained silent.
Mr McIntyre said most port company executives would admit their annual rate of return on assets, compared to capital costs, was not ideal and below accepted corporate returns of 9%-10%.
"These are capital intensive companies.
And the cost of capital is rising by the day," Mr McIntyre said of the present credit crunch and rising costs on most fronts.
He noted Port Otago failed to reach its own "return on assets" target of 5.9% for the past financial year, delivering instead a 5.5% return, while LPC was "close to the 9% corporate hurdle", delivering its shareholders a 8.8% return.
"This low return on assets is ultimately borne by the ratepayer.
"The returns should be higher and could then be used to cushion rates increases, council expenditure or debt retirement," Mr McIntyre said.
While Port Otago and LPC negotiate what is likely to be a complex formula to come up with an agreeable merger proposal, there are broader ramifications for the sector to consider.
A combined Port Chalmers and Lyttelton could seriously threaten smaller ports.
A consolidation of imports or export opportunities between Canterbury and Otago could affect other port operations and their viability.
Unions have already spelled out major concerns for hundreds of staff and the likely impact on small communities already under recessionary pressure.
Further signals abound about the need for change, with Hapag-Lloyd and Port Otago's main shipper Maersk reducing services, the latter prompting a forecast 22% decline in container numbers, from 225,000 forecast to about 175,000.
Regardless of what Port Otago wants to do, it is the Otago Regional Council which has reaped $54 million in dividends from Port Otago since 1988 under the present business model.
As 100% shareholder, the ORC, which has already indicated informally its full support for the merger, will have the final say and explanation to ratepayers on whether a merger is the best option.
