Saturday, April 01, 2006

Christopher Niesche: Tide running against Port Otago's play

Port Otago's attempt to muscle its way into the deal between rival Lyttelton Port and global port giant Hutchison Port Holdings has backfired.

Common wisdom is that Port Otago has bought itself a seat at the negotiating table, but it does look like Lyttelton and Hutchison will still be able to join forces and keep the Dunedin port locked out.

The original deal between Hutchison and Lyttelton Port's majority-owner Christchurch City Holdings would have seen Hong Kong-based Hutchison put its expertise into the underperforming Lyttelton Port. It would also have used the power it gets from owning 40 ports around the world to negotiate better deals with shipping lines for Lyttelton.

But before the deal could proceed, Christchurch City Holdings - the investment arm of the local council - had to complete a full takeover of Lyttelton and then sell a 49 per cent stake to Hutchison.

That's where Port Otago came in. New Zealand has too much port capacity and consolidation has been long expected and, when that happens, some ports will be marginalised.

In an attempt to ensure it wasn't locked out of the deal and left behind in any rationalisation, Port Otago made a $24 million swoop on Lyttelton's share register for a 10.1 per cent stake.

This was enough to block Christchurch's takeover and kill the deal between Hutchison and Lyttelton - or so it seemed on first glance.

Indeed, this week Hutchison withdrew from its plan to take a half stake in Lyttelton.

But it is worth noting that neither party said the deal was off and Hutchison said it was still interested in Lyttelton. There may still be a way.

If Christchurch City can get control of 75 per cent of Lyttelton Port, then that gives it enough votes on the share register to push through material transactions.

Hutchison and Lyttelton Port could then form a joint venture similar to the original plan. Christchurch City could retain the port's assets and Hutchison take control of its operations.

Such a deal isn't possible now because, by engaging in talks with Christchurch City, Hutchison became a related party. This means Christchurch City wouldn't be able to use its shares to vote in favour of any deal with Hutchison.

But if Hutchison walks away, it ceases to be a related party in six months and a deal could go through.

Of course, there are risks. Any such deal could be open to challenge by regulators or by Otago Port - this week's takeover of Waste Management by Transpacific using a similar structure has thrown the spotlight on to these sorts of deals.

Nonetheless, such a plan would explain a couple of things that happened this week.

It would explain why Christchurch City Holdings chief executive Bob Lineham could be so trenchant in his criticism of Port Otago.

"We are not allowing Otago's maverick blocking mechanism to let us waver from our main objective," Lineham said after the deal collapsed.

Second, it would explain why Christchurch City is persisting with the takeover, even after saying the deal is off. Indeed, Christchurch raised its bid by 10c a share to $2.20 and made its bid unconditional even as it announced the deal was over.

Its offer might look a bit mean when you consider Port Otago paid $2.35-a-share for its 10.1 per cent stake.

However, Christchurch City already owns 69 per cent of Lyttelton, so needs only a handful of shares to take it to the 75 per cent it is probably seeking. And if the steady stream of bad economic news over the past few weeks continues and the sharemarket comes off its record highs, that price may not look so bad after all.

It could be that Otago might end up with little to show for its $24 million stake in Lyttelton.

Still, its not all bad news for the southern port.

If Lyttelton Port gets what it hopes to out of the deal with Hutchison, Otago's 10 per cent stake in its Christchurch rival could prove to be a very good investment in its own right.


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