It is no surprise to Port Strategy that there was only one bidder for the Port of Piraeus concession and that in the end, after a request to up its bid, the sole bidder, COSCO, was awarded the whole port concession. However, the price that COSCO was prepared to pay for it is a surprise to PS.
Frankly speaking, the disposal process for the Port of Piraeus disintegrated into what can only be described as a shambles in its latter stages. It was an inherently stop-start
process, the stoppages being punctuated principally by changes of government and policy.
Then there was the change of the original offer. Instead of offering 67% of the port as an outright sale the offer was restructured so that it would be 51% in the first instance
and the balance of the shares up to 67% after five years under certain conditions including the implementation of investments totalling €350m.
The acquisition of the 67% equity stake was thus restructured to come with ‘strings’, specifically the investment requirement which was time scheduled rather than demand initiated, never an aspect liked by potential investors such as international terminal operators.
Hence, COSCO, which already has a large container operation in the port, the lion’s share of which is transhipment, emerged as the successful bidder – although the word ‘successful’ would not apply by normal commercial standards based on the eventual price paid.
COSCO’s initial bid was €293m for 67% of the equity of the company which is listed on the Athens Stock Exchange. It appears this bid was below the minimum valuation of the port established by independent consultants. As a consequence, a mechanism for a second round of bidding was activated, even though there was just one bidder, and on this occasion COSCO came back with an improved offer of €368.5m for a 67% stake. It is this offer that the Greek Government has accepted.
An offer of €368.5m implies a market cap for the company of €550m. This is a premium of 70% over the stock market price at the time the offer was made. This indicates what can only be called a very high bid.
With the net debt of the company at around €30m the implied enterprise value is €580m – pure measure of all the cash flows (discounted by the cost of money – weighted cost of capital) that the company will receive over the lifetime of the concession.
Consider the underlying values: EBITDA (Earnings before Interest, Taxes, Depreciation & Amortisation) is about €25m, so Enterprise Value to EBITDA is about 23 x (€580m divided by €25m). The latter is basically a ridiculous multiple and cannot make financial sense. A normal container port in a low growth area like Europe is typically likely to have an EBITDA multiple in the range 8 to 12. And some might say above 10 is high.
A multiple of 23 only makes sense if there is substantial revenue growth potential and this is a very big ask for a port such as Piraeus. In addition to this, there will be ‘value destruction’ with a large capex commitment of €300m to items that have only limited growth potential. Some of this will be covered by EU grants – for example for the Piraeus Cruise Terminal – but this still leaves an investment requirement of around €150m.
On a similar note, there are large areas of the port, notably in conjunction with the port’s extensive ferry operations, that have traditionally operated on a cost-benefit basis with pricing controls aimed at keeping fares very low.
Deduct tax from EBITDA and you get positive cash flow to the port of Piraeus company of €20m per annum (assuming no annual capex). Bottom line, at this level it will take COSCO 27 years to make its investment back. And with minimum replacement and capex this will go to 30 years or so.
The reality is that the only way this will become what is understood to be a ‘good investment’ in normal terms is with a huge amount of growth in revenue or a comprehensive cost cutting exercise.
There are some growth opportunities but being realistic not enough to drive down the number of years to just six or seven, the normal level at which investors look to make their money back. Some might think a big growth in transhipment cargo will be a good sign but this is an inherently high volume, low yield business so not a solution. Cost cutting is essentially about reducing staff numbers. It is a natural step for COSCO but it is not cheap and will take time.
Sovereign state-owned companies like COSCO have in the past paid exceptional prices for port properties, pushing the envelope of what is regarded as normal. This latest acquisition by COSCO, however, takes this activity into a new, and what many would call unrealistic, dimension.