Highstar wins $700m Port of Oakland concession

Ports America, a stevedore owned by Highstar Capital, has won a 50-year concession and lease agreement with the Port of Oakland in California valued at $700 million.

The contract is the first of its kind for US marine terminals, which are typically leased for much shorter periods and with far fewer capital improvement requirements.

Under the terms of the agreement, Ports America Oakland, a 50-50 joint venture with an affiliate of Mediterranean Shipping Company, will make an upfront investment of approximately $150 million into the first phase of the project.

The Port of Oakland will receive an upfront fee of $60 million out of the $150 million. The remainder will go toward operational and environmental improvements at the five berths being leased, berths 20 through 24. Ports America Oakland will then earn revenues from stevedoring operations at the berths’ container terminals for 50 years minus direct operating expenses of $50 million per year.

The port will also receive an annual lease payment, which will start at $19.5 million and will escalate over the term of the concession, which begins in January 2010.

Port of Oakland: leasing terminal space Source: Port of Oakland

The current tenant at the berths, Maersk-owned APM Terminals, will vacate the terminals by that date and Ports America Oakland will have to attract its own container traffic.

Attracting traffic could prove difficult in the current climate. The investment, which is currently being financed on an all-equity basis, comes at a time when US ports have been suffering from plummeting container traffic due to the recession, with volumes at the Port of Oakland, the nation’s third busiest seaport, down 6.4 percent in 2008.

But Christopher Lee, founder and managing partner at Highstar Capital, is bullish on prospects for long-term container traffic in Northern California and believes Ports America will be able to attract adequate volumes for the terminals.

“I’ve been in this business [infrastructure] for 30 years and I’ve been through many crises. I believe this one will be longer and deeper than most, but I believe we’ll come out on the other end,” Lee said.

He explained that the recovery curve for container traffic resembles a hockey stick in that container volumes typically outpace growth in gross domestic product by a factor of two to one, but “after bad periods, there’s a phenomenal catch-up of 15 percent plus”.

The concession will help Ports America position itself to benefit the recovery, Lee said.

“Before the crisis started there were very serious issues of port congestion in the [neighbouring] Port of Long Beach . . . once the economy recovers, those issues are still going to be there and there needs to be a solution and that solution is going to be the Port of Oakland,” Lee added.

Chris Lee

A second, larger phase could involve investing up to $350 million to enable intermodal rail connections with BNSF and Union Pacific rail lines to berths 25 and 26. The berths’ lease agreements expire in 2013, at which point Ports America Oakland will be able to bid on that opportunity.

The Port of Oakland estimates that Ports America Oakland’s total investment over the life of the concession will reach more than $2.5 billion and create 6,000 jobs.

The port issued a request for proposals for the project in May 2008. It received responses from nine parties, including Macquarie Capital, RREEF-owned Maher Terminals, Ports America, APM Terminals, Hutchison Port Holdings and a consortium of shipping lines K-line, HMM and Yang Ming.

In July, Maher, APM, Ports America, Hutchison and the K-line consortium were shortlisted for the concession.

Highstar Capital acquired Ports America in March 2007 from Dubai Ports World, which was unable to acquire the whole of its predecessor company, P&O Ports, due to a national security controversy related to its foreign status. Highstar won the auction for P&O’s North American operations, which it rebranded as Ports America and merged with two other US-based port operators, AMPORTS and MTC Holdings, to create the largest stevedore in the US, with operations at 50 ports and 97 terminals.

Highstar financed all three acquisitions with capital from its third and largest infrastructure fund – Highstar Capital III – which closed on $3.5 billion in October 2007 and is now about two-thirds invested, Lee said.

To date, the fund has not made any exits, Lee added.