A safe harbour for investment

The prospects for a renaissance in container terminal investment are promising. Carriers, faced with business challenges and depleted balance sheets, have demonstrated a willingness to offload terminal assets. Institutional investors, ready to deploy high levels of uninvested capital, are expected to be attracted by lower valuations compared with the container terminal transactions of 2005 to 2007, and brightening prospects for US terminals.  

Yet these carrier-owned assets differ subtly from the independently operated terminals that attracted valuations of 20x+ EBITDA, demanding intense scrutiny from suitors who are presented with specific operational and commercial considerations in this emerging second age of terminal investing.

Container terminals as an asset class

From 2005 to 2007, institutional investors acquired equity in five of the largest privately held terminal operators in the US, in transactions that valued the terminal operators at EBITDA multiples upwards of 20x. Volumes, particularly in Trans-Pacific trades, were heavily impacted by the subsequent economic slowdown, limiting revenue generated by container terminals in the US and curtailing further investments.

Container volumes are slowly recovering; the Port of Los Angeles recorded throughput of 8.1 million TEU (twenty foot equivalent units) in 2012, up from 6.7 million TEU in 2009, and approaching the 8.5 million TEU high in 2006. Container volumes through US ports have recorded three straight years of growth, and the Shanghai International Shipping Institute forecast this to continue through 2013. Confidence in volume resilience is demonstrated by the investments being made at US ports, Colliers having identified budgeted capex for 2013 of $700 million at the Port of Long Beach, $345 million in New York, and $300 million in Los Angeles.

Container terminals have been growing to cater for volume growth but there hasn’t been excess capacity, in the US or globally, to the extent of being detrimental to profitability. Drewry has forecast global container traffic to grow by 4.7 percent in 2013, followed by 5.7 percent in 2014, while expecting terminal capacity to grow at a CAGR (compound annual growth rate) of 3.9 percent from 2011 to 2014, nudging utilisation up to 69 percent in 2014 from 67 percent in 2011.

All of the major global terminal operators reported net margins of between 15 percent to 35 percent in 2012. Many of the large US terminal operators are private, so results are unavailable in the public domain, but terminals under public ownership indicate strong profitability: Virginia International Terminals generated operating income of $92 million, Georgia Ports Authority (operator of Savannah’s Garden City Terminal) returned an operating income of $78 million on $284 million revenue, and Port of Houston reported its highest-ever container revenue.

Based on the few recent transactions, EBITDA multiples of 10 to 15x are now typical, a discount on valuations from the first wave of acquisitions.  However, industry commentators, including APMT’s chief executive officer Kim Fejfer, forecast that valuations are on their way up again due to liquidity in global markets and large numbers of investors recognising yield potential.

Carriers receptive to terminal sale

It will be a few years before the initial investors reach the end of their investment horizon, leaving limited prospects for further acquisitions of privately held terminal operations in the US. Many public terminals, concentrated on the East Coast, have seen major capital projects in preparation for the larger vessels anticipated following Panama Canal widening, and this capital burden muddies the value proposition for potential privatisers. Carriers, however, have demonstrated an appetite for realising the value of terminal assets to enhance their financial position. 

Container carriers were hit by the volume drop-off in 2008 and 2009, coupled with a glut of new vessel capacity, resulting in low rates even after volumes started to rebound. A number of major carriers today contend with mounting debt burdens and face challenges in covering interest payments. Recent examples of willingness to ease challenges through terminal divestment include Yang Ming’s 30 percent sale of KMCT in Taiwan in December 2012, MSC’s 35 percent sale of its global terminal portfolio in April, and CMA CGM’s 49 percent sale of its global terminal division, finalised in June.

In the US, the majority of carrier-owned terminals are found on the West Coast, and many facilities at the ports of Long Beach, Los Angeles, Oakland, Seattle and Tacoma have a parent facing financial challenges.

Major US terminal holdings of global container carriers

Carrier

Terminal Entity

Ownership (%)

US Locations

APL

Eagle Marine Services

100%

Los Angeles, Oakland, Seattle

CCNI

Florida International Terminal

50%

Port Everglades

China Shipping

West Basin Container Terminal

40%

Los Angeles

CMA CGM

South Florida Container Terminal

51%

Miami

CSAV

Florida International Terminal

50%

Port Everglades

Evergreen

Evergreen

100%

Los Angeles, Tacoma

 

Seaside Transportation Services

N/A

Oakland

Hanjin

Total Terminals International

54%

Long Beach, Oakland, Seattle

Hyundai Marine

California United Terminal

100%

Los Angeles

 

Washington United Terminal

100%

Tacoma

K Line

International Transportation Service

100%

Long Beach, Tacoma

 

Husky

100%

Tacoma

Mitsui (MOL)

TraPac

100%

Los Angeles, Oakland, Jacksonville

MSC

Terminal Investment Limited

65%

Port Everglades

NYK Line

Yusen Terminals

100%

Los Angeles, Oakland

OOCL

Long Beach Container Terminal

100%

Long Beach

Yang Ming

West Basin Container Terminal

40%

Los Angeles

 

Olympic Container Terminal

100%

Tacoma

 

Data according to public sources; excludes minority positions and APM Terminals, which is considered independent of Maersk Line

Investment in carrier terminals: considerations

Investment in carrier-owned terminals differs from the terminal investments between 2005 and 2007.  The US terminal operators that attracted investment during this period (including MTC and P&O Ports, Maher, SSA Marine, and what is now Global Terminals) operate multi-user facilities, typically independent of direct carrier control. Acquisition of carrier terminals presents a subtly different value proposition, one that carries specific opportunity and risk.

Potential operational efficiency opportunity

  • Carrier facilities evolved as dedicated facilities, often treated as cost centres rather than charging market rates for handling services, reducing incentive for efficiency drives;
  • Scale and utilisation advantages compelled terminals to separate terminals divisions in order to serve alliance partners and other customers, yet the majority of US carrier-owned terminals remain assets of respective shipping lines;
  • Because parent carrier and alliance volumes remain captive, scrutiny applied to terminal operations can be less intense that at privately held terminals;
  • Potential opportunities may be presented for investors to drive margin improvements and enhance ability to compete for other customers;
  • Due diligence to gauge opportunity would consider the existing operation, including facilities, equipment, management, and labour, as well as the competitive environment.

Potential commercial and counterparty risks

  • To mitigate risk to the carrier of heightened future terminal handling charges, the sale may include clauses limiting adjustment of charges;
  • The new owner may be obligated to honour long-term unprofitable handling agreements;
  • Counterparty risk may be presented if the prior owner, accounting for a high proportion of volumes handled, faces financial challenges;
  • Volume risk may be presented if the terminal cannot present a competitive value proposition to carriers once currently captive volumes become more footloose;
  • Due diligence would include current commercial contracts, and appraising the commercial offering presented by the facility.

In summary, an increase in container terminal investing in the US is expected, and the asset class once again presents value to canny investors harbouring a lengthy investment horizon. Investors will need to be mindful of the differences between carrier-owned and privately owned terminals, and fully appraise the opportunity and risk presented by assets that subtly differ from those of the first wave of investment.  

Henry Pringle is an associate in AlixPartners’ transportation practice in the firm’s New York office; Foster Finley is a managing director at AlixPartners and head of the firm’s transportation practice in North America, also based in New York