Brian Gaynor: Port's viability hinges on dispute outcome

Both the Maritime Union and the port company have entrenched views on contracting. Photo / Richard Robinson

Opinion

The Ports of Auckland (POA) industrial dispute is developing into a life-and-death situation for the company and the Maritime Union.

The port company is looking for a game-breaker because it has been hammered by Port of Tauranga (POT) in recent years. The Bay of Plenty company, which was dismissed as a small-time player when it was listed 20 years ago, has now passed POA in terms of revenue, earnings and most importantly, dividends.

One of POA's biggest issues is its wage bill of $54.9 million compared with POT's total employee expenses of $25.3 million, even though the latter is now the larger port.

Unless the Auckland port can grow its revenue and reduce its costs it will become a second-class port and will not be able to pay the dividends that Auckland City would expect.

When Port of Tauranga issued its prospectus in March 1992, it was forecasting September 1992 year revenue of $32.2 million, ebitda (earnings before interest, tax, depreciation and amortisation) of $19.9 million, net profit after tax of $6.8 million and total dividends of $3.6 million.

The company issued 20 million new shares at $1.05 each and the Waikato Regional Council sold all its 12.6 million shares at the same price. After the initial public offering, the company had a sharemarket value of $80 million, based on its $1.05 issue price, with Bay of Plenty Regional Council holding 55.3 per cent.

POT is an excellent model for the proposed partial sale of the Crown-owned electricity generators and Solid Energy.

The port company had a 10 per cent ownership restriction, a strong board and management and has performed exceptionally well as a listed company under the public/private ownership model.

In 2002, the company had a capital return of $7 per cancelled share on the basis of one share for every eight shares held, and the following year it had a two-for-one share split. Thus an investor who bought 1000 shares for $1050 in the IPO has had $875 of capital returned, and the remaining 1750 shares are now worth $17,850 at $10.20 a share. These figures do not take into account total dividends of more than $370 million over the two decades.

In other words, POT's sharemarket value has surged from $80 million to $1368 million over this 20-year period and the Bay of Plenty Regional Council, which still owns 55 per cent, has been a major beneficiary of this.

Ports of Auckland listed on the NZX in October 1993, following the sale of 39.8 million shares or 20 per cent of the company by the Waikato Regional Council at $1.60 a share. This gave the company a sharemarket value of $318 million, with the Auckland Regional Services Trust retaining its 80 per cent stake.

Between 1995 and 2002, the company had two capital returns and three special dividends as it sold off surplus land. During this period it had total capital returns and dividends of $556 million, well in excess of POT's payouts.

On April 1, 2005, Auckland Regional Holdings, which had retained its 80 per cent stake, announced a takeover offer for POA at $8 a share, valuing the company at $848 million. This compared with the pre-bid price of $6.44 a share and Grant Samuel's valuation of between $7.68 and $8.55 a share.

POA's share price had reached $8.66 in 2003, but slumped after the December 2003 announcement that NZAX (P&O Nedlloyd and NYK) would transfer its services from POA to POT representing about 45,000 TEUs (containers) per annum.

The $8 a share bid was successful, POA was delisted and is now 100 per cent owned by Auckland City.

The NZAX contract was only the beginning as far as the POA/POT competition is concerned.

POT originally served the logging and wood sectors but expanded into a full service port with large and modern terminal facilities and an inland port in South Auckland. It has competed vigorously with POA for container volumes and has been highly successful. In the eight years ending June 2011, its container volumes increased by 68.8 per cent compared with POA's 37.7 per cent rise. It has also been highly successful in terms of non-container traffic with its cargo throughput (log and coal exports, etc) increasing by 27.3 per cent since 2003, while POA's breakbulk cargo (used vehicle imports, cement, etc) has declined by 23.9 per cent over the same period.

As the accompanying figures show, POA has been hammered by POT in recent years: POA's ebitda has fallen from $92.6 million in 2003 to $74.4 million, whereas POT's has increased from $69.5 million to $95.0 million; POA's ebitda margin has fallen from 55.3 per cent to 40.5 per cent while POT's has increased from 47.6 per cent to 51.2 per cent; most importantly, POA's dividend has declined from $34.5 million to $17.6 million while POT's has increased from $22.8 million to $40.2 million.

This is a huge concern to Auckland ratepayers as the $17.8 million POA dividend represents a return of only 2.1 per cent on POA's $848 million 2005 takeover value.

The biggest difference between the two companies is in terms of costs as they both have fairly similar total revenue, but POA has had total June 2011 year costs of $109.4 million compared with POT's $90.3 million.

This is where the argument about internal employees and outsourcing comes in, the issue at the heart of the current industrial dispute.

In 2010, POA had total employee expenses of $51.9 million compared with only $18.5 million at POT and last year employee benefits plus pension costs were $54.9 million at POA compared with POT's $25.3 million.

The big difference between the two companies is in terms of contracting out.

POA has 522 employees whereas POT has 160 permanent and 30 casual employees and, at any one time, a significant number of contractors working for it. These contractors are not included in the employee expenses quoted above.

There is little doubt that the employees/contractors mix at POT works much better than the employees-only model at POA and it is not surprising that the current industrial dispute continues to escalate because POA and the Maritime Union have entrenched views on contracting.

Contracting gives a port company greater ability to reduce costs when business is static or declining, as POT showed between 2003-07.

But the poor performance of POA can also be attributed to the company's board, management and politicians.

The board's capital management has been poor as dividend payouts have been too high. As a result, POA's debt is much higher than POT's and the former had net interest costs of $20.7 million in the June 2011 year compared with POT's $10.6 million.

POT's senior management team has always been open, energetic and visionary while POA's management team has been haughty and insular, and must take some of the blame for the company's poor performance.

Politicians have also interfered too much with POA. They have extracted too much cash in the form of dividends and this week Auckland Mayor Len Brown and former Auckland Regional Council head Mike Lee couldn't resist having their say on the company.

Lee made the ridiculous statement that POA and POT should act in an anti-competitive way by working together to get better rates from shipping companies. He went on to say that the shipping cartel Maersk and Fonterra "have kept prices right down by playing Tauranga off with Auckland" - yet Lee was primarily responsible for stopping merger talks between POA and POT.

The politicians should stay out of the industrial dispute and leave POA and the Maritime Union to sort out their differences. However, the dispute looks like it will be long and ugly because Ports of Auckland must reduce its cost structure if it is to provide any competition to Port of Tauranga.

* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.