Ocean carriers’ recent container terminal sales implies the need for more cash
reserves to see them through a further period of financial drought. Although
ocean carriers’ recent annual reports paint a profitable picture in 2013,
continuing asset sales indicates that confidence is not running high. CMA CGM
and MSC’s subsequent sales of minority stakes in their container terminal
portfolios, on top of Yang Ming’s sale of an additional 30% of its container
terminal in Kaohsiung in December (see Carriers under pressure to sell assets,
CIW 4 February 2013), suggests that yet more belt tightening is expected. The
way that freight rates and cargo growth are currently moving in the mighty
transpacific and Asia-Europe trade lanes makes it seem a prudent move.Global
Infrastructure Partners (GIP) is paying $1.9 billion for a 35% stake in Terminal
Investment Limited (TIL), the terminals portfolio associated with MSC,
suggesting an overall valuation of around $5.4 billion for a portfolio which
handled 12.1 million teu in 2011 (equity adjusted figure). China Merchants
Holdings International (CMHI) meanwhile is paying around $500 million for a 49%
stake in CMA CGM’s Terminal Link (TL), equating to an overall value of around $1
billion – for a portfolio of 5.5 million equity teu in 2011.On the face of
it, it looks like a higher price was paid for TIL but sadly there is no
transparency on the EBITDA margins of each business. Plus there are the
inevitable idiosyncrasies – in the case of TL, CMHI is being guaranteed a 7-8%
level of return for the first seven years of ownership for example. Also, the TL
deal excludes the new terminals under development and certain specific existing
assets, whereas the TIL deal includes both existing and planned terminals.On
a general basis, it is clear that valuations for port and terminal assets are
currently typically in the range of 10-12 x EBITDA – a far cry from the heady
days of the mid-2000s when multiples in excess of 20 x EBITDA were common for
port assets. Nevertheless, the recent deals suggest that both the TL and TIL
portfolios are profitable businesses – investors would not be paying hard earned
money for them were they not.This is significant, given that given that the
terminal portfolios of shipping lines commonly have their origins as cost
centres rather than profit centres. Assuming that the TIL and TL deals have been
transacted around the current market price, it suggests that CMA CGM and MSC
have been able to sell at a relatively good time – the days of 20 x plus
multiples for valuations are unlikely to return for a long time – if
ever.Back in the heady days of 2006, Orient Overseas International Ltd.
(OOIL) sold most of its terminals division (four container terminals in New York
and Vancouver) to Ontario Teachers’ Pension Plan (OTPP) for $2.4 billion. It was
one of the earliest and most significant disposals of port assets by a liner
company and it was done at the top of the market, with OTPP paying a price which
equated to around 24 x EBITDA.For OOIL it raised cash and realised the value
of non-core assets whilst for OTPP it represented a relatively low risk, long
term cash generator. Selling off terminal assets at prices like this looked like
an irresistible option for other carriers. However, OOIL could not have sold at
a better time as just a few months later the US sub-prime mortgage scandal hit
and a year after that the global financial crisis started to kick in.In the
same year as the OOIL-OTPP deal, Hanjin Shipping sold a 40% stake in its
terminals in Kaoshiung, Tokyo, Osaka, Long Beach, Oakland and Seattle to an
investment vehicle of Macquarie.This deal is interesting in that it is more
akin to the deals which have just been done – where the carriers have retained a
majority stake in, and hence control of, their terminal portfolios. This also
has a key bearing on the type of buyers who are attracted to the table. The
global and international stevedores like Hutchison, APM Terminals and DP World
generally seek a controlling interest in all of their terminals, and so minority
stakes in portfolios have limited attraction for them. However, for more
financially oriented investors, a minority stake is perfectly acceptable,
provided that it comes with a reasonable voice on the Board.Whilst the
characteristics of the TL and TIL portfolios and the nature of the deals on the
table tended to attract financial investors rather than other terminal
operators, GIP and CMHI are both interesting hybrids. GIP has its roots as an
infrastructure investor, but has in its team considerable terminal operator
experience coming especially from former industry leader P&O Ports. CMHI is
also a company with its roots as an investor, but in recent years has been
presenting itself as more of a hands-on operator than a passive stakeholder. The
offer of stakes in TL and TIL appealed both as financial investments but also as
a means of rapidly expanding the buyers’ footprints in the port sector.
So, are we likely to see other carriers selling stakes in their terminal portfolios? The list of candidates with significant portfolios includes Coscon, China Shipping, Evergreen, APL/NOL, Yang Ming, Hyundai and the three Japanese lines. OOCL also still has stakes in four large terminals.Yang Ming recently divested 40% of its Kao Ming terminal in Kaohsiung. Interestingly the buyers included Ports America and CMHI but also Cosco Pacific and China Shipping Terminal Development. The latter is also acquiring a 24% stake in APMT’s Zeebrugge terminal. So what might be seen as potential sellers of terminal stakes are, at least in this instance, buyers.It is clear that the financial pressures on carriers are not going to go away – they will surely need to raise cash in 2013 for example – but will they go the same way as CMA CGM and MSC and divest stakes in terminal portfolios?The ingredients are certainly there – ongoing cash pressures on carriers, valuations of terminal portfolios at a level attractive to both sellers and buyers, and suitable buyers with active interest and access to finance. However, at the same time, carriers’ terminal portfolios will likely remain at times the only profitable aspect of their businesses, and so perhaps should be held on to at all costs – or preferably enhanced.Our ViewCarriers will remain under significant pressure to raise cash in 2013 and beyond due to the challenging conditions in their core activity. This will increase their focus on what to do with non-core activities and assets such as terminals.Selling stakes in their terminals will surely be part of achieving cash generation for some. For others, the ongoing cash generation from continuing to own and operate terminals may be seen as a better solution to stabilise results.
So, are we likely to see other carriers selling stakes in their terminal portfolios? The list of candidates with significant portfolios includes Coscon, China Shipping, Evergreen, APL/NOL, Yang Ming, Hyundai and the three Japanese lines. OOCL also still has stakes in four large terminals.Yang Ming recently divested 40% of its Kao Ming terminal in Kaohsiung. Interestingly the buyers included Ports America and CMHI but also Cosco Pacific and China Shipping Terminal Development. The latter is also acquiring a 24% stake in APMT’s Zeebrugge terminal. So what might be seen as potential sellers of terminal stakes are, at least in this instance, buyers.It is clear that the financial pressures on carriers are not going to go away – they will surely need to raise cash in 2013 for example – but will they go the same way as CMA CGM and MSC and divest stakes in terminal portfolios?The ingredients are certainly there – ongoing cash pressures on carriers, valuations of terminal portfolios at a level attractive to both sellers and buyers, and suitable buyers with active interest and access to finance. However, at the same time, carriers’ terminal portfolios will likely remain at times the only profitable aspect of their businesses, and so perhaps should be held on to at all costs – or preferably enhanced.Our ViewCarriers will remain under significant pressure to raise cash in 2013 and beyond due to the challenging conditions in their core activity. This will increase their focus on what to do with non-core activities and assets such as terminals.Selling stakes in their terminals will surely be part of achieving cash generation for some. For others, the ongoing cash generation from continuing to own and operate terminals may be seen as a better solution to stabilise results.