Potential sale of Port of Tauranga shares good for market, company and regional council - analyst

Investors are anticipating details of a potential large sale of Port of Tauranga shares by the local regional council. Photo / Alex Cairns

Unlocking the Bay of Plenty Regional Council’s big block of shares in the Port of Tauranga would not only bring fresh investors to the company, it would help lift the port’s weighting in the NZX 50 index and provide the region with a new investment war chest, says Craigs Investment Partners.

Senior research analyst Mohandeep Singh said while there’s still a way to go until the regional council makes any final decision to sell down some of its 54.1 per cent stake in New Zealand’s biggest and main export port, the proposal is positive for the sharemarket because the stock is relatively illiquid and access to the shares has been difficult, particularly for larger funds.

The council has approved the proposed sell-down of its Port of Tauranga shares held by its investment arm Quayside Holdings. The approval allows for a managed sell-down to a minimum of 28%. This large cornerstone shareholding would allow the council to block any future takeover of the port.

If Quayside were to sell down to 28%, at the current price this would equate to more than $850 million of stock needing to be absorbed by the market, Singh said.

There is yet no detail on the structure or timing of the potential sell-down. Before any sale can go ahead the council has said it still needs to consider and approve details of the process that would be followed and the conditions of any sale of shares. No sale process is under way and no timeframe has been set for any sale.

Singh said Port of Tauranga (POT) was currently number 17 on the NZX 50 index, with a weighting of 1.3%. Its market capitalisation on Wednesday was $3.34 billion.

“The NZX 50 index is a modified market cap weighted index – essentially each company is weighted by its free float. The current free float of POT is around 46% [ie 100% minus Quayside’s 54% holding]. Any reduction in Quayside’s holding would add to the free float of POT, helping lift its weighting in the NZX 50 index.”

Mohandeep Singh, senior research analyst at Craigs Investment Partners.

Free float is the percentage of a company’s shares freely available to trade. As the council’s shareholding decreased, the free float would increase, thus commanding a higher calculation and weighing in the index.

If the council eventually approves a selldown to a 28% holding, it won’t pocket the total proceeds.

Singh said as soon as Quayside’s stake fell below 50.1%, it was required to repay the $200m perpetual preference shares (PPS) currently in the market.

“In practice, falling below at 50.1% holding triggers a put option which requires the BOP Regional Council to purchase the PPS at $1.00, plus any unpaid dividends up until the transfer date ... it stands to reason that any sell-down will be of at least this magnitude.”

Part of the rationale of reducing the shareholding is that the port makes up more than 80% of Quayside’s investment portfolio. A sell-down to a 28% holding could deliver the council a $650m investment war chest after the PPS were repaid.

In 2023-24 the council received a dividend of $45m from Quayside which made up 24% of the council’s annual revenue.

“This gives some context as to the importance of the POT holding to the council at present,” Singh said.

He believed if and when the council repaid the perpetual preference shares, they would be cancelled.

These shares were a debt instrument for the council, which would save $10m in interest costs from their cancellation, he said.

It wouldn’t be unusual for any council share offer to include a price discount as a carrot.

“It’s not unusual to have a small discount to the markets to get a large block away.”

A share sell-down by the council would not affect the port’s operations, Singh said.

“For the most part the council has been a reasonably silent majority shareholder. It hasn’t delved too much into the inner workings of things [at the port],” Singh said.

“But it would bring new investors to the register, potentially some from offshore.

“And it’s a good thing for Quayside. With 80% of its assets in the port, from a diversification point of view, that’s not a great thing over time.

“It’s a sensible move from Quayside’s perspective.”

Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the $26 billion dairy industry, agribusiness, exporting and the logistics sector and supply chains.