News / CMA CGM's terminal sale reveals true value of ports sector

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Last week’s €400m acquisition of a 49% stake in CMA CGM’s container terminal operating arm, Terminal Link, by Chinese port operator China Merchants, is a sign of just how much port valuations have declined since the Lehman-collapse-inspired recession began.

The price for half of a business that handled 8.1m teu in 2011 (the last year for which we have full figures), shows just how much of an asset bubble was created in the ports industry prior to the financial crisis.

The apex of that inflation was reached in 2007 when Deutsche Bank’s infrastructure investment arm RREEF bought Maher Terminals in New York for $2.7bn, a business that at the time handled around 1.5m teu per year at its New York gateway terminal, and was on the cusp of opening an untried greenfield terminal at Canada’s Pacific port of Prince Rupert – which according to the latest figures from the port authority, handled just over 500,000 teu last year.

Nonetheless, compare and contrast – Terminal Link, with 8.1m teu, is valued at around €800m – or just over $1bn; while Maher Terminals, with 1.5m teu, less than a quarter of the volumes of the CMA CGM subsidiary, went for nearly three times as much.

“Everyone knew at the time that it was a lot of money,” Dean Davison, senior consultant at Ocean Shipping Consultants, told The Loadstar. “The timing for the sellers was fantastic because nobody knew what was around the corner.”

Neil Davidson, senior ports advisor at Drewry, who has been involved in a series of port acquisition deals, said that price-earnings multiples have effectively halved since the recession. “The purchase of Maher and other terminals at that time represented a 25 price-earnings ratio, which seemed extraordinary. The 10-14p/e, which is the range that the Terminal Link purchase is in, is a much more realistic range – it’s more grounded in the reality of the terminals business rather than as a result of a frantic flight to buy things.”

Port industry observers have long questioned the value of the Maher price tag, and there have been consistent rumours since the recession bit that RREEF has been looking to exit the business. These have been compounded by the fact that at some point in the not-too-distant future it will have to refinance something that is now worth a lot less than the price originally paid.

However, there are other differences between then and now. One key point is that the seller is CMA CGM, the world’s third largest container shipping company, which has faced serious financial problems over the past couple of years as a result of the overcapacity on the liner trades and the volatile freight rates. Selling its terminal assets is one way to plug the gap in its finances – it sold a 50% stake in Malta Freeport to Turkey’s Yildirim Group in 2011, while the year before Yildirim had acquired a 20% stake in the carrier itself.

But in attracting the China Merchants investment, an added complexity appears to have been incorporated into the deal. According to analysts, included in the deal is a guaranteed return of 7-8% on China Merchants’ investment, so CMA CGM must pay it around €30m in annual returns for the next seven years, irrespective of the financial or operational performance of the portfolio.

“Given the contract guarantees that CMA CGM provides CMHI an annual return of 7.5% (or €30m) on its €400m investment for seven years, the deal would value the 49% stake in Terminal Link at 13x forward P/E,” a Goldman Sachs note said.

Additionally, consultancy Alphaliner reported today that the acquisition covered 10 of the 15 terminals in the Terminal Link portfolio. Terminals included in the deal are shown in the box below, according to Alphaliner, while its 10% stake in the developing Rotterdam World Gateway at the Maasvlakte II is outside, along with the 25% stake in a Long Beach terminal bought in December, its 50% in the forthcoming Fos2XL Terminal A development, and its stakes in new developments at the Egyptian port of Damietta and the Vietnamese port of Cai Mep, both of which are currently shelved.

The second point is that by acquiring the 49% stake, in all likelihood, China Merchants has propelled itself into the league of global terminal operators, which analysts believe is an important strategic development as it seeks to insulate itself from the slowdown in China’s export volumes and a possible contraction in global outsourcing activity.

“We see the deal as a valid choice for CMHI’s strategy to grow through M&As against a secular downtrend of global outsourcing and China’s export growth,” a report from Jeffries’ analysts said.

It continued: “In addition, the partnership with CMA CGM also opened a significant potential for CMHI’s future overseas expansion, and benefits CMHI’s existing port portfolio on the back of volume support from CMA CGM.”

The acquisition builds on other recent deals that saw CMHI add to its growing African portfolio with the purchase of 23.5% of the port of Djibouti for $185m. In August it paid $150m for 50% in the company that holds the concession to develop and operate Lome Container Terminal in Togo, from Mediterranean Shipping Co’s terminal arm, Terminal investment Ltd. And along with that deal was a 15-year contract with MSC to use the West African terminal, which will have a 2.2m teu capacity when complete.

Up until this point, China Merchant’s portfolio has been characterised by stakes in terminals across the three main Chinese port areas – the Pearl River Delta, Yangtze River delta and Bo Hai Bay – and while the restriction of the purchase to just 49% of Terminal Link indicates that it will continue to plough the joint-venture furrow, the expansion of assets should see it now qualify as a bonefide global terminal operator.

According to Mr Davidson, author of Drewry’s annual review of global container terminal operators, picking apart the exact throughput from its myriad joint-ventures will be “a complex process”. Drewry defines a global operator as one that has more than 5% of its equity-adjusted throughput coming from terminals outside its home market.

Goldman Sachs estimates that following this acquisition, as well as the Djibouti deal and the purchase of 10% of the Kao Min terminal in Taiwan last year, the company will have 10% of total throughput and 6% of revenues coming from beyond its home markets.

“We think the timing for CMHI’s global expansion is good, as the industry is still experiencing a downturn led by sluggish trade demand but oversupply of shipping capacity. If implemented successfully, the recent series of rapid global acquisitions could prove to be valuable in CMHI’s long-term business development,” a Morgan Stanley note said.