The scene is set for the almost two-year-old proposed merger between Port Otago and Lyttelton Port of Christchurch (LPC) to become one of the most contentious issues faced by southern local bodies and ratepayers in decades.
At stake are local jobs, millions of dollars in dividends and the ability of Port Otago - which favours the merger - to steer its own course in the ever-changing, highly competitive and complex shipping sector.
Port Chalmers is the lifeblood of primary-producing Otago and maintaining its independence is crucial to Sir Clifford Skeggs and Ian Farquhar, both of whom have 40 years of wide-ranging experience in the sector, from the late 1960s to the present.
Both aged 79, the men have served with both the Otago Harbour Board and its successor Port Otago; Sir Clifford for a total of 22 years, including chairman for 15 years between the two entities, and Mr Farquhar for 30 years, including chairman for seven years.
"There is nothing worthwhile in this [merger] proposal for Otago. Port Chalmers is more competitive and capable than Lyttelton. The theory of `greater economies of scale' is absolutely bullshit," Sir Clifford said.
Port Otago is 100%-owned by the Otago Regional Council while LPC is listed on the stock exchange, being 78.7% owned by the Christchurch City Council and 15.48% by Port Otago.
"There's no doubt in my mind that Port Otago will deliver better returns to its shareholder over the next decade, and beyond, on its own than needing to get involved with Lyttelton," Mr Farquhar said in a submission to the Otago Regional Council for its draft annual plan.
The merger proposal evolved between the usually fierce port company rivals in 2008, after Port Otago took a controlling and contentious $37 million, 15% stake in Lyttelton in March 2006, essentially gatecrashing and stopping a proposed takeover and delisting of the company so owner Christchurch City Council could bring in an international management company to oversee the ailing port.
The ports repeatedly said no formal talks were under way, but in October 2008 they jointly announced the merger proposal. Further details have since been largely shrouded in silence.
Similarly, an independent report subsequently undertaken and completed by Antipodes Capital on the proposal has been delivered to the working parties of LPC and Port Otago, but not released publicly.
The lack of comment, or availability for comment, is because as a listed company LPC must inform the sharemarket first of any changes which could affect its share price; neatly curtailing any necessity to respond to questions on details of the merger proposal.
Port Otago chairman John Gilks said, when contacted, that for confidentiality reasons he could not reveal further details but said the Antipodes report "ultimately concluded there was a clear and sound case for the merger of the [two ports'] business operations".
"The proposal is not just about the financials, but the wider interests of Port Otago and the community ... if it's not in those best interests, the Port Otago board won't proceed. We're not committed," he said.
As to why the proposal had taken so long, and lacked detail for public consideration, Mr Gilks said there were "specific commercial reasons, drawn up under a confidentiality agreement" which precluded any release of information at present.
Talks with LPC remained ongoing but there was no timeline set for further disclosure, he said.
The initial proposal announced 22 months ago was for "gaining efficiencies", with one governing body being likely and a merger of operations and business management. There would be shared infrastructure costs, equipment, co-ordination of road and rail use and staff, with each port retaining its own land assets.
It was envisioned the merger would be on a 50-50 basis, but the argument by Sir Clifford and Mr Farquhar is what, if any, advantage or opportunities this would offer Port Otago.
Craigs Investment Partners broker Peter McIntyre said the proposal contained many "barbs" and would present a complex arrangement for shareholders to consider in the future, but said more detail was needed before he could comment further.
"[However] This is a merger of unequal means; LPC assets are far greater than Port Otago's so the balance of [boardroom] power is expected to lie with LPC," Mr McIntyre said.
As reported by the Otago Daily Times in late 2008, for the year 2007-08, Lyttelton had 10 times the tonnage across its wharves as Port Otago, 25% more staff, more than double the ship calls and 33% more revenue, but its shareholder dividend of $4.2 million compared to Port Otago's $9.5 million for the same period. However, the latter included a one-off special dividend for the ORC.
LPC profit for the period was $10.3 million on $83.4 million revenue while Port Otago profit was $27.7 million profit (but including $17.9 million of unrealised property valuation gains) on revenue of $62.5 million.
A more recent comparison, 2008-09, reveals LPC again had 10 times the tonnage across its wharves as Port Otago, including two million tonnes of coal, almost double the ship calls at 1155, and 20% more revenue, but again its shareholder dividend of $5 million was below Port Otago's $6.9 million for the same period.
Mr Gilks, highlighting the larger LPC cargo volumes, said when scrutinising the key performance indicators [quoted above], it had to be considered that Port Otago could see Lyttelton's present "weaknesses" in some areas as an "advantage" where improvements could be made.
In 2009, LPC chairman Rodger Fisher said port amalgamation around the country was "crucial" to ensure long-term viability.
"It is widely accepted that New Zealand ports are not achieving appropriate returns on their assets," Mr Fisher said.
LPC profit for 2008-09 was $10 million on $84.4 million revenue while Port Otago profit was $14.5 million on revenue of $67.2 million.
Annual dividends during the five years to 2009 resulted in Port Otago paying the ORC $36.5 million while LPC paid the Christchurch City Council $34.4 million.
Mr McIntyre said while LPC return of dividends was lower, he believed LPC had withheld some dividends - holding $111 million retained earnings on its balance sheet in 2009 - so as not to boost the coffers of shareholder Port Otago, and instead reinvest in infrastructure.
Port Otago's stake in LPC has reaped it $3.24 million in dividends, which as a net return on the cash investment of 2.1%, coupled with a 2.75% gain on the share price, (had they been sold), achieved a 4.9% annual gain - "a reasonable and satisfactory" return given sector volatility, Mr McIntyre said.
However, Sir Clifford noted that depending on how Port Otago financed the blocking stake, it might be paying a high interest rate compared with the overall percentage gains from dividends.
Mr McIntyre looked at the return on assets and return on equity of both companies, for the full years of 2008 and 2009, with LPC coming out on top.
LPC's return on assets was well above 4% in both years while Port Otago's was just below 3% and on the return on equity, LPC was about 8% annually but Port Otago was about 3.5%.
"Those indicators reflect LPC being a far busier port."
To determine the ports' respective asset values, Mr McIntyre removed the financial contribution of Port Otago subsidiary Chalmers Property, which showed similar values of about $227.3 million for LPC and $203 million for Port Otago.
"The question is whether [the port companies' respective] shareholders and ratepayers see the proposal as an opportunity to add value in the long term, or a selling down of the family silver," Mr McIntyre said.
Sir Clifford's argument goes back to the late 1980s when the Labour-led government culled local authority numbers from 1340 to 620; which disestablished the Otago Harbour Board to become Port Otago in 1989.
Sir Clifford, Dunedin's mayor at the time, remains bitter that instead of a 50-50 share for the respective Dunedin and regional councils, as happened elsewhere, the ORC ended up 100% owner.
"That share of the asset distribution should have stayed [50%] with Dunedin ... for the economy and people locally, but also with benefits for wider Otago," he said.
The ORC has received more than $60 million in dividends from Port Otago since 1998.
At the heart of their argument, the pair highlight that LPC is a larger port with generally more container turnover, larger cargo volumes, staff and revenue, but it urgently requires a massive infrastructure injection after decades of wharfside neglect.
"Otago and Timaru ports have both benefited from the malaise of Lyttelton, because the shipping companies trust their performance," Mr Farquhar said.
"It will take a mammoth effort and significant amount of capital over many years to place Lyttelton on the same performance level as Otago," he said.
In the mid-2000s LPC announced $90 million of capital expenditure, spending about $10 million a year on infrastructure, while at the same time Port Otago was completing a decade-long $90 million spend on maintenance and upgrades, then earlier this year brought forward almost $3 million in planned expenditure to cope with higher than estimated container handling rates.
While LPC's return on assets, through dividends, are low, Port Otago has forged ahead with capital expenditure on its infrastructure and while smaller in scale, Port Otago delivers better dividends.
Sir Clifford and Mr Farquhar speculated the cost-per-container handling at Port Otago was 15%-20% lower than at LPC, and therefore more competitive.
The only dissent between the pair was on the objective of Port Otago taking the contentious $37 million stake in LPC in the first place, which blocked the Christchurch council from bringing in an international port manager.
Sir Clifford argues that even with an international port operator, so much cargo comes out of Otago and Southland it could not have been road- or rail-freighted to Lyttelton, while Mr Farquhar argued that had the management company gained ascent its competitiveness could have been "very detrimental" to Port Chalmers.
LPC has delivered $34.4 million in dividends to its owners during the past five years while Port Otago has delivered $36.5 million, albeit at times underpinned by some profits from its subsidiary Chalmers Property Ltd.
Sir Clifford said, "The Otago Regional Council has not been loyal to Otago. There is justification to retain an Otago [influenced] board with a cross-section of interests, but going to Lyttelton would move away from that."
Both men agreed while a new company might have an equal, 50-50 shareholding between the two companies, Lyttelton would probably claim the head office in view of its greater volume of business.
"We don't need another head office lost to Dunedin," Sir Clifford said of the dozens that have departed in the past 20 years.
Shipping lines, hit hard by the recession and haemorrhaging money with hundreds of ships mothballed around the world, have still been able to call the shots on ports of preference.
Some analysts believe a Port Otago-LPC merger would form a dual-bulwark against shipping line dictates, but Mr Farquhar said shipping giant Maersk "walked away" from the world's largest container port, in Singapore, to set up in Malaysia and similarly threatened a US port with abandonment unless it reviewed its operations.
"New Zealand [cargo] volumes are modest and shipping companies can easily adjust their methods to put pressure on individual ports," he said.
In March, the ORC agreed in principle to the merger proposal, saying more discussion was needed and any merger must benefit Otago.
At the time, ORC chairman Stephen Cairns said, "This [merger proposal] won't go anywhere if there aren't benefits for the ratepayer. It has to be demonstrable that there is an upside for ratepayers".
Mr Gilks said the ORC, as 100% shareholder, was responsible for making details public.
It seems while any merger would involve consultation over detailed business proposals, it would also require precedent-setting approval from the Commerce Commission - arguably the largest hurdle alongside public consultation.
In the meantime, Mr Farquhar and Sir Clifford are demanding the public be fully informed well in advance of the proposal becoming a fait accompli.
Profile:
> Sir Clifford Skeggs: Otago Harbour Board 1968-80; chairman 1973-77. Port Otago 1989-98; chairman 1989-98. Dunedin's mayor 1977-89.
> Ian Farquhar: Otago Harbour Board 1971-89; chairman 1981-83. Port Otago 1989-2001; chairman 1998-2001.
Port Chalmers is more competitive and capable than Lyttelton.
