Ports & terminals – What is driving M&As and capital market activity?
Pictured above: Port of Antwerp. Image courtesy of www.portofantwerp.com
After grinding to a halt in the aftermath of the global financial crisis, M&A activity in the port sector has been growing, with financial investors being particularly active.
Recent M&As indicate the sector is consolidating
Recent media reports suggest that the Belgian cities of Antwerp and Bruges have decided in principle to merge into one, a new port authority for the coastal port of Zeebrugge and the larger, more inland port of Antwerp. While Zeebrugge is a leading ro-ro port and a natural gas hub, Antwerp is the second largest port in Europe, providing multiple multimodal connections to the rest of Europe via road, rail, barge and feeder services. As a result, it is a major hub across a range of cargo types – container, chemicals and break bulk. A merger of Belgium’s two largest port authorities will have positive cost implications.
The unification is subject to clearance from authorities and, if it goes through, the combined port will rank a close second to Europe’s largest container hub, Rotterdam. As part of a joint plan, the two ports have defined three strategic priorities – sustainable growth, resilience and leadership in energy and digital transition. After the completion of the deal, the city of Antwerp will own ~80% of the new company, with the city of Bruges controlling the remaining ~20% share.
This planned merger follows an emerging global trend. In 2019, COSCO Shipping Ports announced the signing of a merger agreement with Tianjin Port Holdings and China Merchants International Terminals, consolidating a number of major terminal facilities in China.
The planned regionalisation of ports (region-wise consolidation) in China aims to rationalise capacity planning and reduce damaging competition between neighbouring ports. China now has 9 ports in the global top 25, compared to 11 two years ago. Another deal delivered as part of China’s regionalisation strategy was the July 2020 acquisition of Yingkou Port by Liaoning Port Company (previously known as Dalian Port Company). This all-scrip deal was worth USD 2.39bn (EV/EBITDA of 7.6x vs a long-term average of 11x).
Strategically the deal is focussed on strengthening Liaoning Port’s status as a major gateway port in northeast China. According to the latest figures issued by China’s Ministry of Transport, Port of Dalian has registered an annual decline of 41.7% in volumes to adjust the overstatement of throughput in 2020 as well as volumes shifting to nearby Yingkou Port. Liaoning Port Company’s acquisition of Yingkou Port should help balance-out some of these inter-regional shifts in throughput.
In another deal, Adani Ports and Special Economic Zones (APSEZ) acquired a controlling stake of 75% in Krishnapatnam Ports Company Ltd (KPCL) for USD 1.6bn (equivalent to an EV/EBITDA multiple of 10x). KPCL is a multi-cargo facility port situated in the southern part of Andhra Pradesh, a state which has the second longest coastline in India. The acquisition should accelerate APSEZ towards 500 million metric tonnes per annum by 2025 and is another step in implementing the company’s stated strategy of achieving cargo parity between west and east coasts of India. This latest addition to the portfolio complements Adani’s existing investments in Ennore and Kattupalli, strengthening its market position and control.
From the valuation standpoint, the recent up-move highlights increased M&A activity in the sector. However, despite this increase, valuation remained below the long-term average, showcasing the possible acquisition opportunities.
M&A activity in new growth areas
Consolidation among container shipping lines via mergers and acquisitions and the formation of alliances to improve coordination of capacity on the largest trades have strengthened the lines’ bargaining power with terminal operators. This meant that terminal operators have to compete for fewer services from the three main east-west alliances (2M Alliance, Ocean Alliance and THE Alliance), provide sufficient infrastructure to accept larger vessels as well as contend with slower demand growth. Additionally, liner companies have been integrating vertically by acquiring freight forwarders and other companies along the supply chain within the logistics network (beginning from the doorstep of the seller’s’ warehouse to the buyers’ warehouse). Similarly, terminal operators are exploring common ground with allied logistics players to form a vertically integrated business model allowing port players to make more comprehensive offerings (which are both integrated and near to the customer).
DPW has been on the forefront of exploring synergies across the value chain. Since the beginning of 2018, it has announced more than 10 acquisitions, mainly in logistics and maritime services. Recently, it integrated the operations of ‘Unifeeder Group’ (acquired in December 2018, operating a container feeder and a shortsea network in Europe, the Mediterranean, Black Sea, North Africa and the Middle East) and Feedertech Group (acquired in December 2019, providing shortsea feeder services in Southeast Asia, South Asia and the Middle East). This allowed shippers and consignees worldwide to ship goods through DPW’s major ports to its final destinations across the Middle East, South Asia, Europe and Africa. Likewise, in the Red Sea region, DPW partnered with Saudi Ports Authority (MAWANI) to launch the first direct shipping line connecting UAE’s Jebel Ali Port in Dubai with Egypt’s Sokhna Port through Jeddah Islamic Port – all terminals are operated by DPW.
As a result of this diversification, the company’s revenue mix has changed significantly with the core port operations of DPW contributing 46% to its top line in 2019 (vs 79% in 2015). Even though these acquisitions proved to be margin dilutive, the absolute levels of both revenue and EBITDA have surged.
On similar lines, Abu Dhabi ports, as part of its move towards providing supply chain logistics solutions, has acquired MICCO Logistics. Abu Dhabi ports plans to leverage MICCO’s experience and capabilities, as the Emirate’s first provider of end-to-end logistics solutions including freight management in project, contract and commercial logistics, multi-modal transport, warehousing and distribution, stevedoring, as well as road feeder services for the aviation segment. Also, recently, Abu Dhabi Ports’ maritime arm Safeen has signed an agreement with Allianz Marine & Logistics Services (AMLS) to launch a new integrated maritime logistics services firm – Offshore Support and Logistics Services Company (OFCO – Offshore International). As part of a wider value offering, OFCO will provide its customers access to a wide spectrum of trade logistics and services offered by Abu Dhabi Ports, which include offshore, onshore, base operations, logistics, industrial zone and maritime services.
The pursuit of carriers and terminal operators for greater control of the supply chain is further driving M&A activity in new areas, particularly in allied logistics businesses. From the terminal operators’ perspective this will help them form a vertically integrated business model allowing them to offer a more comprehensive range of services which should translate into higher stickiness of revenues.
Factors facilitating capital market activity
We believe, in addition to addressing the issues of overcapacity, cost efficiency and additional scale, several other factors are also facilitating capital market activity:
Fall in the cost of borrowing: The cost of financing works as a benchmark for ascertaining the net profitability of a project. Abundant liquidity has lowered the cost of financing, which in turn has increased the companies’ ability to take risks. In 2020, despite the heightened fears of recession, port companies continued to access the capital markets to refinance their existing debt. Highly leveraged ICTSI accessed the capital market to raise USD 800mn in 2020. The company plans to use the funds to extend its debt maturity, which will then lower its refinancing risk in the near term. Similarly, government-backed China Merchant Port Holding also raised USD 600mn from the debt market primarily to refinance its existing debt.
Capex requirements: Infrastructure investment is a key enabler of organic growth. In 2020, Santos Brasil raised BRL 790mn (USD 140mn) through a follow-on equity offering, primarily to finance its investment in existing infrastructure. The company is in the midst of expanding the quay of TEV/Tecon Santos, which is expected to be completed by mid-2021. Santos Brasil plans to spend USD 300-400mn in the next two years.
Support inorganic growth: Recently Adani Ports raised USD 500mn from the international debt market soon after the previous issues of USD 300 mn in December 2020 and USD 750mn in July 2020. The money raised will primarily be used to fund its recent acquisitions.
Improved financial leeway for growth: Across the board we have witnessed a fall in the net gearing ratio – a testament that port companies remained on the forefront to benefit from the lower interest rate environment.
Will this generate value for investors?
Abundant liquidity has led the port companies to not only strengthen their balance sheets but also to grow and enter new territories. What does this abundant liquidity mean to investors?
Assuming all other things remain constant, the refinancing of debt with a longer-term debt at a cheaper rate, not only reduces the company’s refinancing risk but also increases shareholders’ return.
Similarly, using the lower interest rate environment to finance capex, if done correctly, will add to the company’s ability to generate future growth. Since the current share price represents the company’s future prospects, investment to improve these prospects should generate higher returns to the shareholders.
The diversification of ports into allied logistics businesses, if integrated well, should support the ROIC profile. Even though logistics is a lower-margin business, it delivers higher ROIC as it is asset light.
We have already seen strong recovery in port companies’ share prices (Figure 6). From here on, sustained growth in valuation will require companies to deliver strong results not only in the upcoming quarters (to benefit from the lower base effect) but also in the foreseeable future. Even though we believe the aforementioned steps are in the right direction for generating long-term value, investors should wait for the valuation to come down.