Does the takeover bid for Lyttelton Port Company by Christchurch City Council give us any signals about a potential buy-back of Genesis Energy, Meridian Energy or Mighty River Power by a left-leaning Government?
This question is relevant because Lianne Dalziel, a former Labour Cabinet minister, is mayor of Christchurch, and Mike Lee, a left wing politician, was chairman of Auckland Regional Council when it bought back Ports of Auckland in 2005.
The Lyttelton Port offer also raised a number of questions about target company valuations, the independence of directors, the role of Port Otago in the bid and takeover regulations.
Lyttelton Port was incorporated on September 30, 1988 following the disestablishment of the old harbour board. The company’s original shareholders were the Christchurch City Council and the Ashburton, Banks Peninsula, Hurunui, Selwyn and Waimakariri district councils.
The company listed on the NZX on July 5, 1996 following the sale of shares by the Hurunui, Selwyn and Waimakariri district councils at $1 each. The $1 a share IPO price valued the company at $101.5 million.
The remaining district councils sold all their shares over the next few years and at the end of 2005 Christchurch City Council owned 69 per cent of the port company with the public owning the rest.
On February 13, 2006 Christchurch City Holdings Ltd (CCHL), which holds the shares on behalf of the city council, notified Lyttelton Port that it would make a takeover offer at $2.10 a share. This valued the port company at $214.7 million.
Before this announcement CCHL had entered an arrangement with Hong Kong-based Hutchinson Port Holdings, the world’s largest port manager. Under this agreement Hutchison would acquire 49.99 per cent of Lyttelton Port if CCHL achieved 100 per cent control through the takeover offer.
Port Otago threw a spanner in the works when it acquired 10.1 per cent of Lyttelton Port at $2.35 a share before the bid was officially launched. The independent adviser’s report valued Lyttelton Port between $2.05 and $2.35 a share, compared with the $2.10 offer price, and directors unanimously recommended that shareholders should not accept the offer.
CCHL raised its offer to $2.20 a share but the bidder reached only 74.1 per cent, the offer was unsuccessful and the Hutchison agreement lapsed. Subsequently CCHL raised its stake to 79.7 per cent through the “creep” provisions of the Takeovers Code and Port Otago increased its holding to 15.5 per cent.
The 2010 and 2011 Canterbury earthquakes had a devastating impact on Lyttelton Port as wharves moved seawards, seawalls slumped and there was substantial additional damage.
The port continued to operate after the quakes because of emergency repairs. However, the port’s infrastructure remains fragile and the company has initiated a $1 billion recovery plan.
This will be partially funded by insurance recoveries of $438.4 million over the past four years.
On August 6 CCHL notified Lyttelton Port that it intended to make another takeover offer at $3.95 a share, excluding the subsequently announced 20 cents a share special dividend. This $3.95 a share offer values the company at $403.9 million compared with the $101.5 million IPO valuation and $224.9 million at the revised offer of $2.20 a share in 2006.
The latest independent adviser’s report values Lyttelton Port at $3.35 to $3.65 a share and directors have recommended that shareholders should accept the offer.
CCHL has already reached 96.2 per cent because Port Otago had a pre-arrangement with CCHL to accept the bid.
There are a number of issues raised by the Lyttelton Port offer including;
– The offer values Lyttelton Port at $403.9 million even though the company has $322.2 million of cash, no debt and $533.1 million of shareholder funds. These latter figures are temporarily inflated because they include the insurance payments while the recovery plan will cost $1 billion. Lyttelton Port does not have a huge war chest as it has substantial capital commitments over the next few years.
– Although CCHL owned 79.7 per cent of the company before the current bid the port company’s board is remarkably independent and effective. Directors recommended rejection of the 2006 offer, the company was adequately insured when the earthquakes struck and they have done a remarkably good job in preserving the company’s value.
– Port Otago has described the Lyttelton Port holding as a long-term investment and “we continue to be of the view that in conjunction with Lyttelton Port we can contribute positively to the future direction of the South Island port industry”.
Nevertheless, Port Otago has found the $62.6 million offer for its 15.5 per cent stake very attractive as it pays an annual dividend of only $12 million to the Otago Regional Council, its 100 per cent shareholder.
– One of the frustrating aspects of the Takeovers Code is that a bidder can move to compulsory acquisition once they reach 90 per cent and CCHL has already achieved this because of its arrangement with Port Otago. However, if a bidder reaches 90 per cent, but gets less than 50 per cent of the outstanding shares, then the holdout shareholders can object and the Takeovers Panel must appoint another independent expert to determine the “fair and reasonable” value of the shares. This represents a viable option for Lyttelton Port shareholders who believe the offer is too low as CCHL needs to obtain more than 97.59 per cent to ensure no one can exercise this option (this is because CCHL and Port Otago are associate parties under the Takeovers Code as their pre-bid holdings are combined).
In general, there is a big difference between the buy-back strategies of local authorities and central governments. Local authorities tend to buy back infrastructure assets when they already have a majority stake. For example, Auckland Regional Council owned 80 per cent of Ports of Auckland when it made its successful offer and CCHL owned 79.7 per cent of Lyttelton Port before the current bid.
Central governments tend to acquire listed companies on a “too big to fail” basis. In other words, the Government has bailed out large companies facing major financial difficulties. These include the full buy-back of KiwiRail, the purchase of 82 per cent of Air New Zealand in 2001, the bailout of Bank of New Zealand and the effective purchase of South Canterbury Finance through the repayment of investors. During the global financial crisis a large number of companies around the world were bailed out by governments.
Thus, the bid for Lyttelton Port by CCHL gives no signals that a left- leaning government would buy back Genesis Energy, Meridian Energy or Mighty River Power unless they experience major difficulties.
The buy-back of Ports of Auckland and Lyttelton Port clearly shows that some local authorities are more interested in buying back their listed companies instead of encouraging them to grow.
The Bay of Plenty Regional Council is a great example of a growth- oriented local authority.
When Port of Tauranga listed in 1993 the council’s 56.1 per cent shareholding was worth only $44 million and it received an annual dividend of just $1.7 million from the port company.
The council’s 54.9 per cent Port of Tauranga stake is now worth $1190 million and it received dividends of $36.9 million for the June 2014 year.
It is a shame that more local authorities don’t realise that a sharemarket listing can result in a substantial increase in value and dividend income.
Disclosure of interests; Milford Asset Management holds Port of Tauranga shares on behalf of clients.