Sell, lease or hold?

Sell, lease or hold?

The most tangible effect of last year's DP World tempest may be its impact on the valuation of U.S. container terminals. News coverage of the controversy introduced ports to the general public - and to investment bankers, who suddenly smelled profits in the terminal business.

This year has brought a surge in acquisitions of terminal operations - the North American properties of the former P&O Ports and Orient Overseas (International) Ltd., Maher Terminals and, this month, Marine Terminals Corp. Industry veterans can scarcely believe the prices.

High multiples for terminals reflect supply and demand. On the demand side, international trade volume continues to grow. On the supply side, only a limited number of sites are available for development or expansion of container ports.

The supply-demand equation presents a problem for the public agencies that oversee - and in some cases, also operate - major U.S. container ports. For private investors, container terminals are strictly a question of return on investment. Public port authorities have a different mandate. Their main motivation is economic benefits for their community and region.

These benefits don't come cheap. Container terminals often cost more than ports can easily raise through state or local taxes or through port-generated revenue. Where will the money come from? Increasingly, the answer is private investors.

For ports, the financial community's interest in container terminals raises new issues: How does a port authority prevent public investment from being jeopardized by the short-term thinking that's so prevalent among financial institutions? But the new developments also offer potential opportunities.

Jerry Bridges, executive director of the Virginia Port Authority, has said that although the VPA's terminals aren't for sale, if some financial institution made a multibillion-dollar offer for them, he'd have to listen. So would almost any port director.

Although we haven't seen a major public port being sold outright to private investors, the idea doesn't seem as far-fetched as it once did. There have been similar acquisitions of long-term leases involving toll roads.

A more likely scenario for ports is one we're already seeing: agreements for private financing of terminals' development and/or operation of ports under long-term leases. These leases' financial terms typically contain incentives to increase cargo volume, as well as tightly written rules to ensure that the terminals are maintained and run for maximum public benefit.

Properly structured, these agreements provide ports with money for development, investors with good returns, port communities with economic benefits and customers with competitive rates and service. Everyone wins.