The bandwagon may be slowing now following the credit crunch but nevertheless 2007 will not be forgotten for some landmark deals with North America being a particular hotspot for these.

North America hotspot

One of the most notable deals completed in 2007 – a deal that has almost moved into legend – was the sale by Orient Overseas International Ltd (OOIL) of its four North American Terminals to the Ontario Teachers’ Pension Plan Board for the sum of US$2.35bn. These container terminals comprised two terminals in the Port of Vancouver, Deltaport and Vanterm, the New York Container Terminal on Staten Island, New York and the Global Terminal in Bayonne, New Jersey.

The price paid by the Ontario Teachers’ Pension Plan Board, according to Morgan Stanley speaking at the time of the sale, implies 28 times 2007 earnings. A healthy multiple by anyone’s standards.

The pension plan itself said at the time the terminals had combined annual sales of about $500m and that they would be included in the fund’s infrastructure and timber portfolio which following this acquisition would have assets of around $6.5bn.

Aside from the cash bonus OOIL received from the sale, it has also benefited from a hike in its share price as a result of both the sale process and the actual sale price. When trading of its shares resumed immediately after the first announcement of the deal they hit an all time high of HK$46 (US$5.9). Further, it was notable up to this point that the market value of OOIL had risen more than 63% since July 2, when OOIL first declared its intention to sell the four terminals.

Clearly, this cashing in of its North American terminal assets was a nifty piece of financial footwork by OOIL and one that astutely tapped into the willingness of pension funds and private equity concerns to pay top dollar for container terminal companies that generate stable cash streams.

It is also interesting to reflect that at one time shipping lines – OOIL has its roots in shipping – traditionally used to sell port assets when they hit major downturns in the shipping business, and particularly at the bust end of the boom and bust cycle in container shipping. In this instance, however, the complete opposite has been achieved; selling at a point which increasingly looks like it will be seen as the top of the market.

The influence of the new financial entities focusing on the ports sector can also be seen in the sale this year of Maher Terminals, the Port Elizabeth-based container terminal operator in New York/New Jersey. Maher, a family-owned business, originally declared its intention to seek a minority partner to help finance its expansion efforts but in the end due to the positive financial climate decided to seek a buyer for the whole company and settled on US-based RREEF Alternative Investments, a real estate, infrastructure, equity and hedge fund arm of Frankfurt-based Deutsche Bank. The financial terms for the deal have not been disclosed but it is clear that the offer put to the Maher family was one that they could not walk away from.

For its part, there is clearly a strong interest on the part of RREEF to expand and grow the business in North America and possibly outside it. It is significant in this respect, for instance, that RREEF will keep the Maher Terminals name and leadership including Brian Maher, chairman and chief executive, and president Basil Maher. Further, Brian Maher said at the time of the conclusion of the sale in March this year: “As the environment changes in the port industry, RREEF provides Maher increased ability to compete on a global level. Their vision of growth and value creation will lead us in the future as we grow our existing terminal businesses and compete for additional capacity in the North American market.”

Another family-owned business to fall to the charms of the investor was Carrix Inc, whose subsidiary SSA Marine is the largest US-owned port terminal operator. Carrix concluded a sale of 49% of its group to the Goldman Sachs Infrastructure Partners fund in early September this year. As in the case of the Maher deal, the price was not disclosed but it is likely to have been sizable, particularly as it is known that in 2006 the Smith/Hemmingway family who own Carrix were being wooed by three investment groups who were said to be interesting in bidding around the two billion dollar mark. Certainly, it is likely that this level of valuation for the whole group would have been significantly inflated a year on.

Interestingly, Goldman Sachs has a reputation for not sitting on its investments for the longer term but in this instance informed sources indicate that it may intend to stick with the investment for a longer period than is normal. Goldman Sachs had of course entered the port sector even earlier as part of a consortium that acquired the major British port operator Associated British Ports (ABP) in 2006. The Goldman Sachs group paid £2.8bn ($5.1bn) for ABP.

RREEF, who acquired Maher Terminals, also has similar experience in the UK having acquired a 49% stake in the business of Peel Holdings for £800m at the end of 2006. Peel owns Scottish ports and the Port of Liverpool in the UK.

Yet another major port deal in North America closed by an investment company was the acquisition of Marine Terminals Corp (MTC) by AIG Global Investment Group. MTC has a particularly strong position on the US West Coast in container handling and the its acquisition by AIG will undoubtedly have complemented its earlier purchase of the P&O Ports’ US terminal holdings from DP World. AIG, in fact, has managed to achieve through these two acquisitions what no traditional industry participant has, namely, establishing a strong terminal operating position on every coast of the US.

A question of appetite

It will be interesting to see if the latter new breed of port investors maintain their appetite for investing in port projects in 2008. They have consumed a lot in both 2006 and 2007 but will the credit crunch serve to curtail their activities going forward? Does it mean the highly leveraged financial models they employ for acquisitions won’t work? Some parties suggest this will prove to be the case. Other critics of these new “players” ask how long will they stay and what really do they bring to the industry in terms of expertise? Can they really expect to grow the businesses they have acquired by transplanting their expertise into new locations?

Just as it has been interesting to witness the phenomenal build up of interest in the port sector on the part of these investors over 2007, it will be equally, if not more, interesting to see how the answers to these latter questions begin to unfold over 2008.