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Strategic stakes in operating subsidiaries can bring large paper losses, but the economics of such tie-ups carry little significance at times. That is the case for APM Terminals’ co-controlling stake in Global Ports, the largest container terminal operator in Eastern Europe.

As everybody in the industry knows, the Global Ports investment is under water. The unrealised paper loss for APM Terminals – one of the five core divisions of AP Møller-Maersk, which owns roughly one third of Global Ports’ shares outstanding – runs in the order of $698m, excluding dividend payments which have been received during the holding period, according to my calculations.

Bad news? Not really.

Firstly, there are signs the investment could yield dividends over the medium term, one way or another. After all, APMM could not predict the current meltdown in Russia and the inevitable valuation plunge in Global Ports shares, which are highly illiquid and are meant to be highly volatile in the light of a low free-float.

Secondly, APMM didn’t have much choice but to allocate capital to Global Ports a couple of years ago when it first invested, not only because the APM Terminals unit must have a presence in strategic hubs, such as Russia, but also because that division commands far higher returns on invested capital than other businesses in the APMM portfolio.

The stake

APM Terminals acquired a 37.5% stake in Global Ports for $860m in November 2012 from its majority owner Transportation Investment Holdings (N-Trans), which currently owns 30.75%. The same amount is also held now by APM Terminals, whose initial 37.5% stake was diluted following Global Ports’ purchase of NCC in September 2013. NCC is the second-largest container terminals operator in Russia.

In the last twelve months, some $2bn in value has been wiped off Global Ports, whose market cap currently stands at about $500m. The average price target from brokers has dropped to $11 a share from $16 over the period; the shares currently trade below $3. Moreover, the spread between consensus estimates and the stock price – at just $2 in early June  – has widened to $8.2.

There’s only one way for the shares now, and that is up, in my view.

Most of APM Terminals’ unrealised losses have been recorded in the second half of 2014, as you may imagine, given Russia’s turmoil, currency woes, and plummeting oil prices.

While Global Ports’ stock price may suggest distress, the Russian group is working hard to become a more efficient enterprise via the implementation of cost efficiency measures that will likely lead to an improvement in operating margins. Its operating cash flow profile is reassuring and net leverage, meanwhile, is steadily, albeit slowly, declining.


Still, with high net leverage at 3.5x and $1.3bn of net debt, Global Ports isn’t exactly a safe investment, the bears argue. Are they right?

Global Ports is a strong Russian borrower backed by domestic lenders and international banks with branches in Russia. As such, lenders will be unlikely to pull the plug on a key player even it became harder for the business to operate as a going concern.

Consider the $238.4m syndicated debt facilities put in place to back the purchase of NCC: the loan was structured with a tenor of seven years and a three-year grace period. In spite of loose credit conditions, “not many borrowers in EMEA can secure debt deals on such convenient terms,” a senior Russian banker close to the deal told The Loadstar.

The cost of funding wasn’t prohibitive, either.

For AP Møller-Maersk, which has a pile of debt and a diverse investor base, such relationships are incredibly important.

APM Terminals is divesting assets, and that’s part of APMM’s broader strategy to focus on its five core divisions, but investments are also taking place.

One of its latest projects, called TCM, signals a commitment to expanding fast and building a presence in Central America (specifically in Costa Rica). Does it mean APM Terminals may decide to trim its stake in Global Ports to fund expansion elsewhere?

Well, I believe APM Terminals will likely hold onto its stake in Global Ports until the shares appreciate – and even then, it will likely remain invested. Of course, APMM could also use the stake in future as part payment for other stakes and acquisitions, in which case it will fetch a premium.

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