Behind the acquisition frenzy

Behind the acquisition frenzy

As one marine terminal operator after another has been snapped up by in-vestment firms for extra-ordinary prices this year, many in the maritime industry have been taken aback by the arrival of unfamiliar players whose plans and intentions are not well-known or understood.

But there is one aspect of this wave of acquisitions about which there should be no mystery: The deals provide new and credible confirmation of the growing reality of freight transport bottlenecks in North America. For a maritime industry that has had difficulty getting policymakers to understand and react to this growing threat to the economy, the transactions tell a compelling story.

There is an obvious pack mentality behind many of the agreements, the latest being the acquisition of a 49 percent stake in Carrix Inc., parent company of SSA Marine and Tideworks Technology, by Goldman Sachs Infrastructure Partners, owner of Associated British Ports, for an undisclosed sum. That follows in no specific order the acquisition of the U.S. operations of P&O Ports and Marine Terminals Corp. by AIG; of Maher Terminals by a unit of Deutsche Bank; of Orient Overseas International Ltd. terminals in New York-New Jersey and Vancouver, British Columbia, by the Ontario Teachers' Pension Plan; and of Halifax's Halterm by Macquerie Infrastructure Partners.

Wall Street often acts in streaks, with a game of follow-the-leader resulting in a series of deals in quick succession before investors lose interest and seek the next play elsewhere.

But beyond the frenzy that has engulfed port investments, there are underlying reasons why terminal operators today might be good investments, though at prices equaling 20 to 30 times earnings, it's anybody's guess.

Marine terminals are infrastructure, and what is driving a proliferation of infrastructure investment globally - Goldman Sachs closed its first global infrastructure fund in December with $6.5 billion committed - is not a mystery. It's essentially that along a highway, you want to be the one who owns the tollbooth, especially when there are only a few highways, they're jam-packed, and alternative routes are practically nonexistent.

That is the situation that describes assets ranging from airports to pipelines to toll roads, bridges and railroads at a time of strong global economic growth and increasing barriers to new infrastructure construction. Analysts observed that Warren Buffet's increased 11 percent stake in BNSF was tied to the railroad's enviable position as one of only two western rail systems at a time when demand for rail transport is soaring.

Terminals are positioned well along this privileged corridor. As shippers know, their ability to avoid major ports such as Los Angeles-Long Beach, where MTC and SSA have large container operations, re-mains quite limited, however scary the prospect of a congestion meltdown or longshore labor dispute may be.

When International Longshore and Warehouse Union members are warned that if they don't agree to efficiency-improving work rule changes, the cargo will go elsewhere, those warnings usually fall on deaf ears, and not just because the dockworkers are stubborn. They know that alternative capacity in Mexico, Canada or the East Coast is not easily found and that there's too much growth and concentration of population, cargo, distribution centers and railheads in Southern California for any significant diversion to occur.

The same can be said of New York or Vancouver, and even smaller ports such as Halifax are not likely to see their franchise disappear.

Thus, even though terminal investment may turn out to be nothing more than a fad, the fact that it has caught Wall Street's attention in a significant way is confirmation of the long-term infrastructure shortages that industry figures have been sounding off about for years, with little response from policymakers. The railroads have proposed an investment tax credit that has barely budged in Washington, for example.

"Investments in rail capacity are not anywhere close to the pace needed to meet rail infrastructure requirements," Surface Transportation Board Chairman Charles Nottingham told Reuters recently.

That's a concern to shippers who are seeing their rail rates increase, just like lack of terminal expansion at ports is causing congestion. But from the investors' perspective, it's a different story. An opportunity for them is evidence of a problem for shippers.