Brian Gaynor: Commercial wins over political at port any day

Auckland Regional Holdings' takeover offer for Ports of Auckland doesn't make commercial sense for several reasons, including:

* The port has made excellent progress in terms of productivity and efficiency under stock exchange listing and this is unlikely to be maintained under public ownership.

* The bidder seems to be more interested in the non-commercial land holdings yet it has made a bid for the whole company.

* One of Auckland Regional Holdings' main objectives is to contribute funding to the region's inadequate roading and rail system yet it is spending $170 million to acquire 20 per cent of a company it already controls.

The initial impression is that the takeover offer is based on antiquated ideology rather than sound commercial logic.

My first exposure to the Ports of Auckland was during a short visit to New Zealand in May 1973. The abiding memory of Auckland's downtown waterfront, which had been in public ownership since the Auckland Harbour Board Act 1871, was its dilapidated and rundown state.

There was limited public access, rusting iron fences surrounded it and waterfront workers took long smokos in the autumn sun.

All that changed when the Port Companies Act 1988 replaced the old Harbour Board Act and Ports of Auckland was established as a limited liability company. Auckland Regional Council was gifted an 80 per cent shareholding and the Waikato Regional Council 20 per cent.

Five years later, in July 1993, as part of further local government reform, the Auckland Regional Council transferred its 80 per cent stake to Auckland Regional Services Trust. This was subsequently reassigned to Infrastructure Auckland and to Auckland Regional Holdings on July 1 last.

ARH is not a conventional limited liability company. It is a council-controlled organisation, established under the Local Government (Auckland) Amendment Act 2004 and controlled by the Auckland Regional Council.

ARH has total assets of $1.3 billion and a net worth, after liabilities, of $1 billion.

Its main holdings are 80 per cent of Ports of Auckland and 100 per cent of Northern Disposal Systems and America's Cup Village. The latter is a property management and development company that owns land, marina berths, water management and seabed rights in the Viaduct Basin and western waterfront area.

ARH also has cash investments of $629 million in the form of bank bills.

One of the main objectives of the ARC-controlled organisation is to contribute funds to the development of Auckland's transport infrastructure - roading and rail transport.

As far as Ports of Auckland is concerned the change from direct political control to a commercial structure in the late 1980s had a huge positive impact through the introduction of business disciplines. The prospect of a stock exchange listing was an additional incentive.

Between 1988 and 1993, the port made spectacular progress as the number of employees dropped from 1393 to 504, annual productivity rose from 4900 tonnes to 15,500 tonnes per employee and the turnaround time for container ships plunged from 38.4 hours to 15.7 hours.

Although Ports of Auckland and the other port companies performed far better after commercialisation, the investing public remained sceptical. The negative perception of port companies had been entrenched during their political-control era.

Port of Tauranga came to the market in 1992 and analysts and investors were extremely cautious about its prospects.

When Waikato Regional Council sold its 20 per cent stake in Ports of Auckland at $1.60 a share in 1993, they dropped to $1.40 soon after the stock exchange listing.

But Ports of Auckland has excelled under finance sector and media scrutiny. Continued assessment by shareholders, analysts and the media has resulted in a far superior performance under the stock exchange listing compared with the long period under direct political influence.

Crane productivity has lifted 31 per cent since listing, the cost of handling a container has fallen 25 per cent, operating earnings have risen from $36.9 million to $75.1 million and the operating margin from 34.7 per cent to 46 per cent.

Additionally, in just 12 years under partial private ownership, the Auckland waterfront has been converted into a vibrant area with extensive public access, restaurants, bars and hotels.

What did the politicians achieve in the 117 years the harbour area was under their control?

Ports of Auckland is two companies in one, a port operation and a property-owning organisation. In simple terms, the port operation extends from Queens Wharf, at the bottom of Queen St, to the Fergusson Container Terminal.

The property operation stretches from Princes Wharf to Westhaven Boat Harbour.

As the accompanying table shows, operating earnings before abnormal items of the port's commercial activities have steadily increased during the past 12 years (the big increase in port assets is due to a revaluation of the division's land, buildings, wharves and pavement in 2002).

The property operations have consistently produced a far lower return on assets and this has forced the company to sell off surplus land (the low return on property assets has also restricted Ports of Auckland's ability to gear its balance sheet and make further capital returns to shareholders).

It is the sale of this land, potentially to overseas interests, that has caused local politicians to become hot and bothered and is the main reason behind the takeover offer for Ports of Auckland.

But why is ARH, which is supposed to be contributing funds to Auckland's creaking road and rail system, spending money on one of the region's best-run assets when there are several better alternatives, including:

* The ARC or ARH could make an offer for the waterfront property it requires and then sell shares in Ports of Auckland to fund this purchase (there are some restrictions under the Local Government (Auckland) Amendment Act 2004 on its ability to sell these shares).

* Ports of Auckland could be split in two with a listed port operation and listed property company. ARH could then make a takeover offer for the property company and sell port company shares to fund it.

* As part of the takeover offer, ARH could have made a commitment to re-list the port operation. Instead of an all-cash offer, ARH could have offered debt securities with priority rights to an IPO at a small discount to the issue price. This would have allowed ARH to complete the takeover at a lower price and make more money available for roads and rail transport.

Auckland is a rapidly growing region with limited financial resources and inadequate transport infrastructure. It is vitally important that these limited financial resources are carefully managed and invested in areas that will facilitate Auckland's growth.

Unfortunately, our newly elected local politicians give little confidence that they will manage our limited resources prudently or keep their hands off well-run operations.

Disclosure of interest: Brian Gaynor is a Ports of Auckland shareholder and an executive director of Milford Asset Management.