FYI | Oct 12 2006
By Chris Shaw
A pick up in the level of corporate activity in the Australian market is spreading across the Tasman, with Port of Tauranga (POT.NZ) revealing it is having merger discussions with the unlisted Port of Auckland.
Macquarie suggests a proposal is likely to be presented to shareholders by the end of the year in a deal that would create a company with as much as 85% of the container handling market (by volume) in the north island of New Zealand.
News of the deal sent the Port of Tauranga share price sharply higher yesterday, prompting Macquarie to cut its rating to Underperform. But the bigger issue is regulatory approval, as the broker questions whether it will be granted given the competition issues the merger would create.
SB Citigroup points out the merger as it stands is likely to fail all the Commerce Commission tests for market dominance, though it notes there remains a chance for the deal to be approved given it would be in the national interest to create an internationally competitive port infrastructure.
The broker estimates the synergies of any deal would be significant, as the benefits would include savings on head office costs, operational improvements and lower duplication of capital expenditures. The broker also notes any deal would be beneficial for margins as it would allow the merged company to reduce the power of shipping companies, which every year threaten to make port call changes in order to gain cost reductions.
On the broker’s estimates Port Of Tauranga’s valuation could be boosted by as much as NZ$1.25-$1.50 per share from the synergy benefits the deal offers, though again the regulatory issues leads it to caution some of these may not be realised. The broker rates the stock as Hold pending more details of the proposal.
Credit Suisse also rates the stock as a Hold but sees potential upside from the synergy benefits, estimating NZ$15m annually in savings is reasonable. As a result it suggests the company’s increase in market capitalisation yesterday following news of the deal was reasonable, though it points out further upside is unlikely until further details of the bid and any approval are obtained.
The broker has lifted its share price target to NZ$6.20 from NZ$5.20, putting it well above both Citigroup at NZ$5.04 and Macquarie at NZ$5.30. Thomson One Analytics shows the median price target on the stock is NZ$5.04.
Port of Tauranga shares closed yesterday at NZ$5.96.