As Pittsburgh’s high-profile parking auction enters its final stages – there’s now a winning bid on the table – the market should pause and appreciate the unique aspects of the deal that make it one of the most interesting infrastructure transactions so far this year.
Below are ten things Infrastructure Investor noticed about the deal that merit attention from investors, advisors and politicians interested in attempting similar transactions in the future.
1. Giving away a number won’t doom your deal: Pittsburgh indicated a minimum bid of about $317 million was needed for the deal to work: about $100 million to pay off debt and $217 million to save its pension. Despite the disclosure, the city was still able to get a much-higher bid of $452 million. So signaling a number didn’t doom the deal. But it did prompt at least one bidder to aim low: at $311 million, Carlyle’s bid didn’t even meet the city’s price floor.
2. Extra proceeds equals extra responsibility: Pennsylvania Governor Ed Rendell said in a recent interview with Infrastructure Investor that there should be a “strict prohibition” on mingling proceeds from transportation public-private partnerships with general funds. Pittsburgh’s use of the extra $120 million above its price floor will set an early example for Pennsylvania. Watch it closely.
3. Alignment is key: The $217 million or so that Pittsburgh will place into its pension shows how cities can tackle a thorny issue facing them in these kinds of deals: how to align a long-term asset with a long-term liability. By putting that money toward future pension payments, no one can accuse Pittsburgh of blowing the money all at once on a one-year budget gap.
4. Always have a BAFO: A BAFO, or best-and-final offer, is a clear must-have in any auction of this sort. By forcing the two highest bidders to bid again in a BAFO round, Pittsburgh got nearly $40 million more from the winning team of JPMorgan and LAZ Parking. So, as in Chicago’s parking auction, a BAFO round made a big difference. Ask for it by name.
5. How you open the bids makes a difference: Unlike Chicago, which prefers to open its winning bids in closed quarters, Pittsburgh invited the press and city council for the occasion. Both approaches have merits: in the former, one avoids embarrassment in case bids fall short of expectations or are non-compliant; in the latter, one can claim undeniable transparency. Clearly, though, both can get the job done.
6. Openness generally won’t scare investors: Spending months and months and millions of dollars on a bid process only to have the deal die due to legislative or regulatory approval is every bidder’s worst nightmare. By opening up the process to include key stakeholders and the public, Pittsburgh actually increased the chance that the deal would go through. So the city’s record-setting openness didn’t scare investors; it made the deal more palatable to them.
7. Give second chances: Pittsburgh and Chicago do have one thing in common: both cities will have their parking operated by LAZ. Last year, LAZ ran into trouble when rate increases caused technical glitches with Chicago’s meters. In a recent interview with Infrastructure Investor, Chicago Mayor Richard Daley acknowledged this as a “mistake”. In Pittsburgh, LAZ will clearly have a chance to learn from it.
8. Switch teams if you need to: LAZ didn’t begin the bidding process with its ultimate co-winner, JPMorgan. At the outset, LAZ aligned with LambdaStar Infrastructure Partners and Aurora Capital Partners. The shift may have indicated that LambdaStar didn’t yet have any equity to contribute to the deal, while Aurora declined to invest in it. So just because you don’t have a partner at the outset doesn’t mean you shouldn’t throw your hat into the ring.
9. KKR – no lesson, but further questions: One of the seven firms qualified for the auction was private equity firm Kohlberg Kravis Roberts, which has been attempting to raise an infrastructure fund since early 2009. In the end, there was no KKR bid, raising questions both about how appetising parking is as an infrastructure asset and how appetising the KKR fund is to investors.
10. Be careful with contingencies: In years past, Pittsburgh has had to adjust its annual budgets because the Intergovernmental Cooperation Authority (ICA), an oversight body that must approve its budget, “will not accept numbers that are contingent,” says ICA head Henry Sciortino. By including the $452 million deal proceeds in the 2011 budget, Mayor Ravenstahl is therefore making a bold bet that the deal will go through – soon. One can only hope that the bet won’t go the way of another famous contingent budget in Pennsylvania: in 2007, the Pennsylvania legislature gambled on federal approval of tolling of the I-80 highway in order to fund its transportation needs. Net result: no I-80 tolls and a $60 billion transportation funding crisis.