Buying the future

Buying the future

The port industry is still buzzing over the billion-dollar-plus prices that investment groups paid in a series of deals for U.S. marine terminals last year. By traditional standards, the multiples were sky-high.

Many industry veterans reacted with knowing smiles. They said the nontraditional port investors didn't know what they were getting into. The Wall Streeters, ignorant of how ports operate, were merely pursuing a buy-and-flip strategy and would soon realize how much they'd overpaid.

It may turn out that way, but don't be so sure. The investment groups that have been paying big prices for port assets are smart people who presumably did their homework and went into these deals with their eyes wide open. They insist they're in for the long term, and early signs suggest they're telling the truth - and that they may have spotted potential value that the terminals' previous owners and operators overlooked.

Rick Larrabee, director of port commerce at the Port of New York and New Jersey, said an executive of AIG Hightower, which bought the former P&O Ports operations of DP World, provided a succinct explanation for the prices being paid. "We don't buy the past," the executive told Larrabee. "We buy the future."

Christopher Lee, managing partner at AIG Highstar, told The Journal of Commerce's Container Transport Investment Conference last week that AIG was attracted to New York-New Jersey by global trade trends and the port's tight capacity, stable volumes and revenue, large consumer market and opportunities for "value creation."

That last reason is the main key to why, according to Lee, the five New York-New Jersey terminals that were sold last year fetched prices ranging from 18 to 24 times trailing earnings before interest, taxes, depreciation and amortization.

The question is, how will the new buyers unlock enough value to justify these prices?

One way, common in today's business world, is to artificially dress up financial results by cutting back on vital investment - a shortsighted tactic that has ruined many companies. Ports, still struggling to get their arms around the new paradigm, are moving to ensure that the new owners continue to make investments that generate regional economic benefit.

The most obvious way to make terminals more valuable is to make waterfront operations more efficient. That's why the International Long-shoremen's Association is watching developments carefully as it prepares to negotiate an Atlantic and Gulf master contract to replace the one that expires on Sept. 30, 2010.

It's a new game for all concerned. ILA-management dealings have been based heavily on personal relationships and trust developed over years or even decades. The new terminal owners are numbers guys whose emotional ties are to EBITDA. How will the change affect the next labor contract negotiations? We'll find out in a couple of years, maybe sooner.