The outsourcing trend and strong economic health generally, all supported by the ability to interconnect various tracking and logistics software, has brought about growth in container flows exceeding worldwide gross domestic product (GDP).

In a trend that has been underway since the mid 1990s Neil Davidson, ports expert and research director at Drewry Shipping Consultants, points to yearly growth in teu throughput at the Hamburg-Le Havre range of 11.5% during 2004 and 2005, while GDP in the region advanced at around 2% per annum.For the same period,Drewry data shows North American teu throughput growing at an average annual rate of 8.8%, more than double the 3.5% yearly gains in GDP.

From an investment perspective, the multiples on acquisitions of port projects, often with monopolies or high market concentrations in individual regions, are commanding financial figures well in excess of those typically seen in the transport sector. Craig Fuehrer, managing director of Deutsche Bank’s Transportation Investment Banking group, tells Port Strategy:“In recent acquisitions in the sector,M&A deals have been done at prices that were greater than 17 x projected cash flows; some deals have been done above 20 x cash flow.”

Mr Fuehrer, based in New York, also cited a composite of listed port shares (including Cosco Pacific, China Merchant Holdings, Forth Ports and a number of smaller regional issues) that is priced at between 15 x and 17 x forecast cash flows. By way of comparison, a composite of oil tanker stocks tracked by stockbrokers Jefferies & Co was valued at 7.5 x cash forecast flows for 2007, while a handful of dry bulk shares tracked by the broker was priced at 6 x expected 2007 cash.

The mega-deals in the port sector of late, involving purchases of container terminals by pension funds and infrastructure investment vehicles, have been widely reported.

Investment funds controlled by Australian behemoth Macquarie have been linked to investments in terminals from Korea to Halifax, Canada, while the Canadian pension fund Ontario Teachers’ Pension Plan splashed out $2.35bn for a portion of Orient Overseas International Limited (OOIL)’s North American container terminal business. In a privatisation deal, another Canadian entity, Borealis (tied to another pension fund in Ontario), holds a 33% stake in the Goldman Sachs-led Admiral Consortium that pulled off a £2.8bn acquisition (approximately 15 x earnings before interest, taxes, depreciation and amortisation (EBITDA), a commonly used cash flow measure) of Associated British Ports. In another UK blockbuster deal, reported in late 2006, a Deutsche Bank infrastructure fund gained a regulatory green light to acquire 49% of privately held consolidator and strategic player Peel Ports for around £1.6bn – some 16 x EBITDA.

Furthermore,examples of deals in process abound in the shipping news during the first months of 2007. In Italy, leading investment banks Lehman Brothers and Merrill Lynch, alongside several Italian financial institutions, had put together equity of €2bn ($2.62bn) for an infrastructure fund that could pay investors a 10 return.

With financial leverage considered, buying power could reach up to €12bn ($15.72bn) in size.Partly state-owned,the new fund,F2i,could provide the ports industry with a fresh source of funding. Meanwhile, in Northern Germany, Macquarie was leading the pack in a full-blown bidding competition underway for 49.9% of the container division of the state-owned HHLA in Hamburg, until the sale process was stopped in favour of an initial public offering for 30% of the operator. A strategic player (as contrasted with financial investors), PSA, was actively working on privatisation projects in India and Panama. All of these transactions point to a sector awash in capital.

In a 2006 presentation to the American Association of Port Authorities, finance expert Ira Smelkinson, from investment bank Morgan Stanley, estimated total available equity for infrastructure investments from the leading players (including some, but not all,mentioned in this article) to be in the order of $96bn. Mr Smelkinson estimates “total available funding” to be just short of $500bn, noting that the stable cash flows of infrastructure investments support considerable gearing (in his estimates, 80% leverage). Yet it was politics rather than high multiples that brought port investments into the public consciousness, removing a cloak of anonymity.

In a 2006 deal, characterised by exposed political raw nerves on the heels of a bidding war, Dubai Port World (DPW) grabbed the prized worldwide business of P&O Ports for $6.8bn, only to face a fire-storm in the US over concerns about Middle East ownership of US assets. Opponents were mollified by DPW’s agreement to sell its US assets, in nearly two dozen ports, to a new player in the port sector: insurance and energy giant AIG Global Investment Group (AIGGIG) for a price reported variously between $700m and $1bn, with Deutsche Bank handling the disposition.

The funding for ports throughout the world,in these mega deals and in dozens of smaller transactions, has been influenced by trends in finance but also by changing dynamics of the shipping and logistics businesses that produce cargo flows.

Chris Brown, a partner at London’s Norton Rose law firm, with what it claims is the largest marine practice in the world, tells Port Strategy: “Going forward, the big trend is in sponsor-driven project finance.The shipping lines want to move their cargo faster – they are setting up hubs.”

Drewry’s Mr Davidson agrees, adding:“The shipping lines are concerned about being guaranteed access to capacity. It is also driven by their deployment of larger ships, and the greater risks associated with not being able to have access to capacity for these ships in key ports – filling the ships up is fundamental to getting the benefits of the economies of scale; without certainty of access to the ports that will allow this, then the investment is lost.” Deutsche Bank deal-maker Craig Fuehrer also offered a big picture perspective, telling Port Strategy that shipping companies have always wanted to control terminal capacity, “it’s been that way for years…”, but says the attractiveness of the sector has led to the influx of pension infrastructure funds, who crave the stability of cash flows that such investments offer.“What can be different,“ Mr Fuehrer says,“is that an investment in a populous stable place will see a lower discount rate”, reflecting less uncertainty about conditions.

He adds: “An investment in a developing country may see a higher discount rate.It’s riskier,but its growth rate may also be higher.” He describes his approach to looking at deals as “case by case; each transaction is a little different. We also look at whether existing infrastructure has already been put in place.”

The final strokes of the DPW saga also laid bare a contrast underscoring the shifting dynamics of port finance, where port facilities may initially be financed by public sector entities, such as a Port Authority leasing assets to an operator, and are then transferred to the private sector. In widely reported last minute brinksmanship in New York, the landlord, the Port Authority of New York & New Jersey, was demanding that AGIGIG (which lists overall assets under management at $635bn) put up additional money to compensate the landlord for “improvements” that would benefit the operator.