SKYCITY has signalled a probable legal fight with contractor Fletcher Construction over the delay to the completion of the New Zealand International Convention Centre (NZICC).
In its interim results released today, SKYCITY said the delivery date of mid-2019 of the NZICC and Hobson Street hotel projects would be six months after the contracted date of January that year. That is double the initial three month delay announced last year.
SKYCITY chief executive Graeme Stephens told the Ticker this morning his company was entitled to claim damages because of the delay, which he had always considered to be six months.
“We are flagging that now because we are getting to the phase of the construction where the end is in sight,” he said.
“Nothing is currently happening but we are flagging the liquidated damages that we are entitled to and, simultaneously, Fletchers, which would be likely to challenge our ability to claim them.”
In its interim results, SKYCITY said: “We remain comfortable with our contractual arrangements, which provide for liquidated damages that should mitigate our losses through delay, but legal challenges from Fletcher Construction are possible.”
Stephens added he wanted to be transparent about the possibility of legal action as “there is going to be some degree of claiming and counterclaiming when we get to the end”.
The delay followed ructions at Fletcher Construction last year, which saw its share price plunge in July after a profit downgrade and the immediate departure of its chief executive, Mark Adamson.
SKYCITY said today it had noted a “positive change” over the past six months in the construction of its two projects with Fletchers.
“The overall programme is well advanced with the core of the Hobson Street hotel now up to the eighth floor (of thirteen) and the slab for the final floor in the NZICC nearing completion,” said the company.
“Overall, we expect our investment in the projects to be in-line with our original budget. We continue to escalate our sales and marketing efforts to confirm the pipeline of convention bookings and, pleasingly, we have secured six major international conferences for 2020.”
So Sky City Entertainment Group Ltd [SKC.NZX] has finally wrapped up the whole saga over the deal between themselves and the Government over the new National Convention Centre. The deal sees them get loads of concessions - such as their agreement for SKC to remain where they are till 2048 - but certainly no more concessions than they would have got with a previous Labour Govt - their agreement with SKC sees them get 240 odd machines, the same as what they would have got with Labour, except their deal was far more generous and was on a far smaller centre. So Govt favours can be well be discounted. The deal is a winner in most respects. It provides employment for over 1000 people in its building stage and almost 800 people when fully built out. The new centre will cost $315 million to build and fit-out, while the land will be worth $87m.
Construction on the centre is expected to begin in 2014 and open in mid to late 2017. It will cater for 3500 international conference delegates at any one time and attract an estimated 33,000 more delegates each year.
Economic Development minister Steven Joyce made the announcement today alongside SkyCity chief executive Nigel Morrison and Auckland Mayor Len Brown at SkyCity.
"An international convention centre in Auckland will be a major asset for New Zealand and will generate significant spin-off benefits including a projected $90 million annual injection into the economy. The deal is politically neutral so can be done fairly and above board. The only "problem" I see is what Sky City are going to get out of It, and that is simply answered by two words. Thats business. Watch that share price today.
SkyCity got special treatment in its pitch to build the international convention centre - but nothing which will get in the way of a formal deal being struck.
It means the casino and executives can get back to negotiating over the casino's list of changes to the Gambling Act which it wants to trade for building the centre next to its Auckland headquarters. The casino has said it wants 300 more pokies, extra table games and an early extension to its exclusive licence.
While the report revealed SkyCity was treated "very differently" to other bidders, Prime Minister John Key said it "utterly refuted" allegations his Government had struck a "cosy deal" with SkyCity. He blamed officials for "a few procedural matters" but said there was "nothing of substance that would have changed any of the outcomes".
The process problems identified by Deputy Auditor-General Phillippa Smith emerged in the report from the time the Prime Minister - also Tourism Minister - became personally involved. In August 2009, Mr Key told officials to halt a scoping project on a convention centre proposal to "close off the SkyCity angle". He later explained he had a "broad awareness" SkyCity had development plans.
Mr Key's understanding of the casino's desire for development followed a meeting between himself and SkyCity executives although neither Mr Key or the casino "can recall the discussion" on May 14, 2009. There was also a later meeting between the casino and the Prime Minister's chief of staff Wayne Eagleson on June 17, 2009, at which development was discussed.
After the PM halted the scoping project, SkyCity met the PM's senior advisers in September 2009 who said they wanted changes to the Gambling Act which had previously stymied the casino's expansion plans by limiting the number of pokies and other games allowed.
Then Mr Key was briefed on options for the convention centre at a dinner with SkyCity board members and executives on November 4, 2009. He urged them to "think outside the box".
As the casino and Beehive moved closer together, Treasury began raising concerns about "process and probity".
Ms Smith said: "We have concerns about the apparent readiness of officials to support those discussions developing into more substantive negotiations without preparing to give advice on the Government's procedural obligations and options."
Warnings about process were conveyed to Mr Key in a briefing note on November 12, 2009.
In 2010, the Government began calling for an expression of interest from groups wanting the contract. At a meeting with officials, Mr Key said the SkyCity deal was "a good proposal".
However Ms Smith said the process "fell short of good practice in a number of respects". That included the fact ministers and officials continued to have contact with SkyCity to discuss its proposal.
Ms Smith said these meetings were "not appropriate" as it provided SkyCity with information other bidders did not receive. She also said the casino had the advantage in knowing the Government didn't plan on putting any money into the project, allowing it to shape its offer.
In September 2010, the casino put forward a list of changes to the law it wanted. It also said it wanted the Government to buy land from TVNZ to accommodate a large design for the centre.
SkyCity was announced as the preferred bidder in June 2011 with Mr Key promising changes to the Gambling Act would only come after a public submissions.
Greens co-leader Metiria Turei, who sparked the inquiry with a complaint, said the report was "hugely damning" and showed "the relationship with SkyCity was so cosy that the other proposers didn't stand a chance".
Labour leader David Shearer said: "This has had John Key's fingerprints all over it and it was a shonky deal and John Key is donkey-deep in it."
Project's boost to jobs, GDP in question
John Key announced SkyCity's selection as preferred bidder with the promise of 800 jobs on completion and 1000 jobs on construction.
The numbers contrasted with a government feasibility study which put construction jobs at 150 a year for five years - a total of 750. The number of people to be employed in the centre was also lower - between 318 and 479 jobs against 500 fulltime equivalents.
There is also question about the value of the deal to New Zealand, the Prime Minister initially saying it would increase GDP by $49 million. The Auditor-General's report stated a $72 million increase while Economic Development Minister Steven Joyce was last night saying $100 million.
The casino was refusing to comment yesterday as chief executive Nigel Morrison toured Australia with the company's half-year results. In a statement, he said he was looking forward to starting negotiations towards investing the $350 million "provided acceptable returns can be delivered on the total project".
Mr Morrison is known to have become frustrated with delays on the project, the $350 million saved for Auckland's centre recently spent in Australia, supported by both South Australia's Labor Government and Liberal opposition.
Alan Trotter, chief executive of Conventions NZ, said it had cleared the path for the deal to be struck. He said the report also revealed the Prime Minister's ability to strike deals which was to be admired. "There is no such deal as the perfect deal but it's a very pragmatic deal. The key element here is to start construction."
He said conventions of the size the centre would handle needed five to seven years' notice and marketing should begin the moment building started. The centre promised much for New Zealand and the inquiry had sent out ripples of uncertainty. "The Greens have a lot to answer for."
-David Fisher
How events unfolded
May 2009: Key meets SkyCity CEO. Key says changes to the Gambling Act did not come up.
July 2009: Ministry of Tourism and City Council complete convention centre feasibility study. Key briefed on findings and officials recommend developing business case. Officials later told of proposal being developed by SkyCity. Key tells officials to cease work and await SkyCity proposal.
September 2009: SkyCity, Ministry of Economic Development officials and Key's chief of staff discuss Gambling Act changes.
November 2009: Key has dinner with SkyCity board, discussing convention centre and possible changes to the Gambling Act.
March 2010: Cabinet decides to call for "expressions of interest" from other developers. Tender process begins two months later.
May 2011: Process closes. SkyCity, The Edge, Ngati Whatua, Infratil, and ASB Showgrounds respond.
June 2011: SkyCity wins with $350m bid. It requires no state funding but depends on changes to Gambling Act allowing more pokies and other concessions.
June 2012: Deputy Auditor- General Phillippa Smith announces investigation into tendering.
January 2013: Key sees draft report and is "not losing any sleep". The Herald reports SkyCity's plans to increase size of gaming floor.
Artists impression of the Sky City National Convention Centre
News out during the last few weeks that Sky City Entertainment Group Ltd [SKC.NZX] may have negotiated a large increase in the number of gaming machines, tables and other concessions in return for building and funding a National Convention Centre for New Zealand and allowing it to significantly expand its revenues at the Auckland casino is clearly great news for investors. New Zealanders are also set to gain a valuable new addition to the landscape in terms of returns for surrounding businesses and opportunities for the country as a whole.
Lets have a look at how great things might get for us long suffering shareholders.
First of all a couple of negatives. $350 million in shareholder funding will be needed to build the convention centre and ongoing costs will be significant. Convention centres, as a rule, do not make money on their own, they are generally used to bring in foot traffic to other parts of a business or town to push spending in those areas.
This is where the positives for the casino may bear some fruit.
At present the company is restricted by law as to expansion of its gaming business in Auckland and indeed the rest of New Zealand so it has thus far been lowering business costs, debt levels and building attractions like a dozen more eateries and other peripheral gaming stuff to grow revenue and profit and that has been very successful under CEO Nigel Morrison.
Businesses all need to continue to grow though and with the company asking the National Government to allow them to increase the number of gaming machines by up to 1000 and increase the number of table games even agreement for a 25% increase in gaming will clearly be significant for the Auckland site and for shareholders as the vast bulk of group revenue comes from this one site.
Any increase in gaming machines is not going to be politically acceptable to the left, so SKC management are going to find any increase politically tough to push through but I am confident there will be some increase in the levels of gaming at Sky City Auckland.
While building and funding a massive new building at a time of global financial uncertainty is a huge risk. The risk for shareholders is worth taking though given the stagnant nature of revenues at Auckland. Extra foot traffic would boost gaming revenues at the site regardless of a boost in machine numbers so lets hope management have got their modelling right when they factor in the cost of the capital expense, ongoing running costs and the level of extra gaming there has to be to get an acceptable return for shareholders.
