The more, the less merry(2)

If one were to film the TV series Survivor in an alligator-infested swamp, this would be it.

Since August 2008, when the Florida Department of Transportation (FDOT) shortlisted six teams for its “Alligator Alley” project – an attempt to lease a 78-mile highway across the Everglades swamp in the south of the state – bidders have been having second thoughts about whether to pursue the deal.

In April, they started to leave the contest outright. The exodus began with the A2 Transportation Partners – a consortium of Portuguese toll road operator Brisa, CCR – a Brazilian road developer 18 percent owned by Brisa – and a JPMorgan infrastructure fund – which left the contest late that month.

Two other teams – Spanish infrastructure developer Global Via and Italian motorway manager Atlantia – combined their efforts a few weeks before the 4 pm, 18 May deadline for bids – which had been moved back twice due to the difficult credit environment.

But the bid date came and went with a whimper instead of a bang. Rather than announcing a blockbuster bid, FDOT put out a terse statement saying it did not receive any bids for the project.

A persistent rumour then spread through the market that Alligator Alley was not, in fact, a no-bid project. Various stories circulated of a lone bid coming in seven, twelve or fifteen minutes after the bid deadline and being so low the state would not even entertain it – despite it being the only bid available.

FDOT recently clarified it did indeed receive a late bid, which came from Global Via after the 4pm deadline. As such, it was considered “non responsive” to the original instructions to bidders distributed in August 2008, which clearly said no late bids would be accepted – period.

But the fact that a lone investor did, in the end, throw his hat into the ring – after everyone else had jumped ship – invites the question: why did the deal essentially turn into a game of chicken in the middle of an alligator-infested swamp?

Price expectations clearly played a role. In background materials distributed to the six shortlisted bidders for the project, FDOT cited a base case net present value between $750 million to $976 million for all the toll revenues from the highway over a 50-year lease period. Other discounted gross revenue forecasts, based on a 6 percent interest rate over 50 years and higher traffic growth, went as high as $1.9 billion – no small change in the current market.

That proved a difficult range to meet. In a statement issued to reporters in response to queries about whether it bid for the project, Global Via cited price expectations as one reason for not submitting a bid (this was before FDOT’s confirmation that it did submit a bid, albeit late). The firm also said FDOT’s requirement for proposals to be valid for a 150-day period made financing very expensive, considering the financial environment.

Other bidders echoed these sentiments in background conversations, but made it clear price wasn’t the only issue. One investor said his firm mentally checked out of the process early on simply because, with six parties cleared for bidding, it was too crowded. His consortium stayed in the process until late in the game just in case the field thinned out. But with a month left, there were still at least four bidders in the process and eventually his team stayed out of the bidding. So while the mantra, “the more, the merrier” may work well with happy hour gatherings, it certainly does not with competitive bidding processes.

Another factor that made bidding difficult was the nature of the asset itself. Unlike Chicago’s Midway Airport – which, thanks to its large retail component, had much scope for operational improvement –Alligator Alley was essentially a bridge over a swamp. Investors had little opportunity for operational improvements such as retail enhancement since the state wasn’t going to let them build a casino or a McDonald’s in the middle of the Everglades. That left shortlisted parties bidding on the same revenue and traffic projections since they couldn’t get creative.

As a consequence, the process turned into a contest to see who had the lowest cost of capital for the asset – a hard contest to win in this credit market.

Unless, of course, you’re the last man standing.

But by then it might be too late.