Giant's port call rocking the boat

Li Ka-shing

Li Ka-shing arrived in Hong Kong 66 years ago as a penniless refugee. Since then, he has accumulated a personal fortune estimated at US$18.8 billion ($29.53 billion).

His vast business empire spans the globe, stretches into space, employs more than 200,000 people and is valued about HK$706 billion ($143 billion). Li's business prowess has earned him the nickname "Superman" in Hong Kong where many regard him as the island's unofficial ruler.

Now the man ranked by Forbes magazine as the 10th wealthiest in the world is extending an exploratory tentacle into New Zealand's port sector.

Li's Hutchison Port Holdings, the world's biggest container port operator, has been invited in to help the good citizens of Christchurch wring better returns from their historically underperforming Lyttelton operation and ensure it remains a viable concern.

The proposed deal is effectively a joint venture which will see the Christchurch City Council retain control of the port's physical assets while Hutchison assumes control of the port operations, a model which is common overseas. New Zealand's ports are owner operated.

But coming at the same time as anxiety over the prospect of Arab ownership of United States ports, Hutchison's cosy relationship with mainland China's Government and business interests has triggered a wave of opposition to the proposal.

Critics argue such a valuable strategic asset should not pass into foreign control. Others have taken it further, alleging sinister aspects to Hutchison's Chinese links.

Meanwhile, New Zealand's other ports are eyeing the Hutchison Lyttelton Port deal warily as it will potentially trigger a round of consolidation in the sector most commentators agree is long overdue.

As one source close to the deal put it: "The North Island ports will be thinking very, very hard about this. I imagine there's been a few phone lines burning in the last month or two."

At this point, the success of the proposal depends on Christchurch City gaining complete control of the existing listed Lyttelton Port Co in order to delist it and form the new model's component companies.

But with more to lose than most, Lyttelton's tartan-tinged major southern rival, Port Otago, has dealt itself into the game with the canny purchase of a 10.1 per cent Lyttelton Port holding. Port Otago's Geoff Plunket insists the holding is a "long-term investment" rather than a blocking stake.

In any case, it looks likely to give Port Otago a seat at the negotiating table with its northern neighbour and representatives of one of Asia's most potent companies.

In 1861, the same year as the work began on the rail tunnel that would transform Lyttelton into a viable port for Canterbury's burgeoning exports, Hong Kong and Whampoa Dock became Hong Kong's first registered trading company or "hong".

In 1979, Hong Kong Shanghai Bank (HSBC) sold its controlling stake in Hutchison Whampoa, as it was called by then, to Li's Cheung Kong Holdings in a deal that marked the beginning of the end of British dominance of Hong Kong big business.

Li, then the 13-year-old son of a school teacher from Chaozhou, arrived in Hong Kong in 1940 after Japanese bombing raids forced his family from their home.

Li left school early to support his family after the death of his father. He learned the plastics manufacturing business from bottom to top in the 1940s and bought his own factory in 1950.

Taking advantage of the falling property prices resulting from the 1967 riots in his adopted home, Li borrowed money against his plastics factory to build up a formidable real estate empire.

His property development company, listed in 1972, gave him the base enabling him to buy Hutchison Whampoa and become the first Chinese to assume control of one of Hong Kong's leading hongs.

He has since transformed the company into one of the world's leading diversified conglomerates.

During the eighties, Hutchison Whampoa developed its old Hong Kong dockyard sites, which had become prime real estate, it also grew its container operations at home and abroad, and diversified into energy and telecommunications.

In the nineties, Hutchison was part of a group of companies, including Citic, which launched the AsiaSat I satellite. It also entered the US telecommunications business and, in 2000, began securing next-generation mobile phone licences around the world, forming the basis of its global 3G business. Today, Hutchison has diversified holdings in more than 50 countries.

In 2004, the company had combined net income of US$2.07 billion on sales of US$17.30 billion.

About 45 per cent of total sales came from retail and manufacturing, but the second largest share, 16 per cent, came from Hutchison Port Holdings.

Hutchison has interests in 41 ports in 20 countries, including several huge developments in mainland China.

Hutchison has been a central player in a wave of worldwide consolidation sweeping the shipping and ports sector that is now breaking on New Zealand shores.

Some would argue its arrival is none too soon. They include Export NZ chief executive Bob Walters. "It's really, dare one say it, completely out of kilter with international practice to have the number of ports of call that we have in New Zealand for the size of our economy."

Walters said shipping lines might begin to exert pressure to consolidate local ports.

Goldman Sachs JBWere analyst Marcus Curley said the major container shipping companies would be looking for high-quality, efficient operations. "What happens in New Zealand is you get the invested capital spread across a number of ports as opposed to concentrated on one."

With its proposed deal with Hutchison, Christchurch City Holdings (CCH), the council's investment arm that owns 69 per cent of Lyttelton Port, is looking to position the port favourably for the expected shake-up.

CCH chief executive Bob Lineham has said the deal is about securing a long-term strategic alliance with a powerful partner with a record of successful port management, international connections and clout with the shipping lines.

He also believes Lyttelton will benefit from Hutchison's buying power for equipment, good staff training and technical expertise.

A big question that particularly troubles the deal's opponents is: What does Hutchison see in Lyttelton?

The company refused to comment this week but ABN Amro analyst James Miller pointed out opportunities to invest in ports anywhere in the world are extremely rare.

Although modestly sized by international standards and close to the end of the line for shipping companies, Lyttelton serves a natural hinterland that will always attract a certain cargo flow. And it may have looked attractive because of the potential to wring efficiencies from its operations.

But by international standards, that criticism could apply to several local ports which Miller believed Hutchison would also be eyeing.

"Having got in there, Lyttelton could easily be a vehicle for the new partners to trigger consolidation in the wider New Zealand market ... I don't see them being just interested in the South Island and I don't see it stopping New Zealand wide either."

Curley agreed, saying Hutchison might intend using Lyttelton as an example in the region of how value can be added to port operations.

Others who believe Lyttelton has the potential to become much more profitable include Port Otago chairman John Gilks, who recently referred to the port as a "sleeping giant", and former Lyttelton Port chairman Brent Layton. Now director of the NZ Institute for Economic Research, Layton left Lyttelton Port in 2003 after a dispute with Christchurch Mayor Garry Moore over proposed labour reforms.

At the time, Lyttelton was looking to wrest a key shipping contract from Port of Otago. Layton said that was dependent on the port achieving further efficiencies and providing quality 24-hour service at competitive cost.

"There were gains to be made from the reform of labour in 2002 that were significantly over and above what the cost of that reform would be. Given how the profit has declined, and clearly the labour conditions have got better for the workers, there seem to be even bigger gains to be made."

Like Layton, Curley believed labour would probably one of the first areas where the joint venture would try to wring efficiencies from the port.

"And one way they can circumvent labour practice is by putting in better technology and, hence, reducing labour requirements."

Lyttelton has a troubled history of labour relations including a picket line death in 1999.

But Lineham played down the prospects of big changes to the way the port would be run including labour relations and management, if the present deal went ahead.

"We haven't talked a single thing about labour changes. The unions have a two-year contract still to run so there will absolutely no change in that time frame. At the end of the two years, the port will need to negotiate with them just as if there was no ownership change."

Lineham didn't expect any changes in management either.

But all that could be academic unless Christchurch finds a way to make the deal work with Port Otago on board. Miller believed that was the city's only option now.

Although there were signs of annoyance from the Christchurch City/Hutchison camp this week about reports of preliminary discussions with Port Otago, Miller said given Hutchison's likely wider aspirations, it probably welcomed the opportunity to involve Otago.

"If they are a vehicle to trigger consolidation in the New Zealand or Australasian port market, of course they're going to want to do it [a deal that involves Port Otago]. They probably cannot believe their luck how quickly it's happening, people have been waiting 15 years for this."

Curley said he hoped Port Otago's intentions were to play a part in the deal rather than stymie it. "I would be very disappointed if they've just spent $20 million of ratepayers' money on that strategy."

He said Hutchison and Christchurch City continuing with less than 100 per cent of the existing company was "not impossible" but far from ideal. Under a three-way deal "there is a much greater chance of things working out for all three parties and I think Hutchison would certainly want to entertain being involved in both ports".

Although Hutchison's motives are not entirely clear, Curley and Walters viewed the company's interest in New Zealand as positive. "The fact that it is looking to invest in Lyttelton or New Zealand does emphasise that it sees long-term growth through New Zealand ports," said Curley.

Walters said international trade and the way it was handled were changing "and we're just seeing those changes taking place here".


The deal

* In a takeover offer mailed to shareholders this week, Christchurch City's investment company will pay $2.10 a share for the 31 per cent port stake it does not already own.
* If it gains control, the city will sell a 49 per cent stake of the assets to Hutchison Port Holdings.
* Hutchison will take a controlling stake in the newly created port management company.


Li Ka-Shing

* Born 1928 in Chaozhou, China
* Arrived in Hong Kong in 1940 as a penniless 13-year-old war refugee.
* Made his first fortune manufacturing plastic flowers.
* First Chinese to take over a "hong" - Hong Kong's famed trading companies.
* Forbes' 10th richest man in the world.
* Personal fortune estimated at US$18.8 billion.
* Hong Kong-based business empire valued at HK$706 billion.
* Austere tastes include a preference for cheap shoes and plastic watches.
* Reportedly donated US$3 million to Asian tsunami relief in 2004 and HK$1 billion to Hong Kong University in 2005.
* Widowed with two sons, the oldest, Victor, is tipped as his successor.