Wednesday 19th December 2018 |
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Hawke’s Bay Regional Council has agreed to advance plans for the sale of up to 49 percent of Napier Port through a public share offer.
Councillors voted 7-2 in favour of the plan in order to help fund the port’s expansion and meet the council’s own growing capital requirements for environmental remediation, climate change and flood control work.
Staff are to deliver an IPO plan by April for final approval by council with the object of completing the offer by the September quarter of next year. The initial offer will be for a minimum 33 percent and a maximum of 45 percent, with the final offer size to be determined based on liquidity requirements and long-term value.
The sale will not proceed before the port’s board has approved the detailed business case for its planned $142 million Wharf 6 project.
“Under this model, outside capital will fund the port’s growth, but we will retain majority ownership and control of it,” council chair Rex Graham said. “We will also avoid taking on significantly more debt to fund the port which would ultimately cost ratepayers.”
The council has spent the past two years reviewing its future capital needs and those of the port. It went to its ratepayers in October recommending the share sale. Other options had included keeping the port holding intact and funding its expansion with loans and rate increases, selling up to 49 percent to a partner, or selling a long-term operating lease.
The council indicated the share sale could raise $181 million – leaving the council with $83 million after settlement of almost $87 million of port-related debt and sale costs of about $11 million.
Among the key themes from submitters was a strong desire to retain local ownership, an aversion to foreign ownership, a belief that the port should be able to fund its own activities, and the idea that the stake sold should be matched to only the port’s immediate capital needs.
Today’s resolution reflects those wishes, but also the real pressure the port and the council are under to settle the long-term funding of their activities.
Council chief executive James Palmer noted that successive councils had taken only a prudent level of dividends from the port in order to leave it with sufficient funds for its growth.
But he said the scale of investment required now was significant, and he reminded councillors of the double-digit rate rises the region’s ratepayers will also face “for the foreseeable future” to meet the council’s environmental obligations.
Napier Port is the country’s fourth-largest container operation. Yesterday, it reported a 5.4 percent lift in net profit to a record $17.6 million for the year ended Sept. 30. Revenue increased 5.8 percent to $91.7 million and total cargo rose to a record 5.1 million tonnes.
It is forecasting that cargo trade to be close to 6.2 million tonnes by 2027. Log exports are expected to reach 3 million tonnes by then, up from a record 2.2 million tonnes the past year. Container traffic will reach the equivalent of 313,000 20-foot units by 2028, up from 266,006 TEUs in the past year.
The port wants the new wharf commissioned by 2022 in order to reduce congestion and let it cater for larger vessels. A further $320-$350 million will be required during the rest of the decade to replace ageing assets and provide some new container and tug capacity.
Reports for today’s meeting show that, without a capital injection of some sort, the Wharf 6 project will push the port close to the 4.5-times debt-to-earnings cap in its banking covenants by 2021.
With the council’s debt repayment, and $55 million from the port’s own resources, the project can be funded while also keeping that debt-to-earnings ratio at or below 2-times - apart from in 2022 when it is expected to peak at 2.4 times.
Staff advised councillors that offering a smaller stake in the IPO will increase the discount investors will expect to pay for shares and will reduce the funds the council will receive for reinvestment elsewhere. The IPO costs are largely fixed irrespective of the size of the offer.
Reducing the sale to 33 percent could incur a 10 percent discount and would reduce the capital available to council to $32 million. Offering 25 percent could increase the discount to 15 percent and could leave the council with no free capital and potentially still having to inject $2 million into the port company to clear its debt.
Under the resolution approved today, scope has been left for some potential Crown involvement, reflecting submitters’ calls for the council to seek money from the Provincial Growth Fund.
Council staff have already been told that a PGF grant would not be available. To qualify for a Crown loan the council would need to be able to show the investment was creating new economic activity and jobs.
The share sale is also to be structured – without compromising the sale goals or timetable – to maximise the priority allocation to Hawke’s Bay residents, port employees and iwi. That will place locals at the front of the queue for shares, rather than offering them a discount.
Palmer said the council and its advisors will work to maximise local participation, but that may involve trade-offs to ensure sufficient liquidity in the shares.
(BusinessDesk)
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