September 5, 2007
Why investors are craning their necks towards hot port propertyPosted in Celtic Tiger · 5 comments ·
One of the best views of Dublin is from the top of one of the new cranes operated by Irish Ferries down at the docks. These enormous machines move slowly and silently on giant tracks, stacking freight containers.
The Dublin Docks are the epicentre of the Irish economy. Almost everything that comes in and out of the country goes through here. It is a 24-hour hub of activity. This is industrial engineering on a massive scale and the pulse of the economy can be gauged here.
From the top of these colossal cranes, the panorama of the city opens up before you.
This land at the Dublin docks is the prize in a clash of the Irish corporate titans. Irish Ferries — the company that brought you outsourcing — is being fought over and although many deny it, the real asset is not so much the ferries, but the land. Yet again in Ireland, the land obsession is driving business decisions rather than business driving land decisions.
The management of Irish Continental Group — the parent company for Irish Ferries — decided earlier this year to try to buy the company from the shareholders. This is standard stuff and very much the financial story of the past few years, whereby financial engineering has been used to make fortunes for management teams. The fanciful term for this carry-on is “private equity”.
The process works as follows: the management will get the financing in place by getting one of the big Irish banks behind them. They will then borrow enormously to buy all the shares of the company from its shareholders. Once they get hold of the company, they will try to squeeze every bit of cash out of it. This is what the financial markets colourfully call “sweating the asset”.
Remember, the entire deal is based on another expression, “the exit strategy”. The exit strategy is the endgame of getting out of the asset with as much money as possible. This is not always the case but it usually is and it is a business culture that has emerged in recent years. It is the net result of involving financial people — who have no love of the relevant industry — in real nuts and bolts businesses.
Typically, this involves radical cost-cutting combined with a strategy to break the company up into its constituent parts. The management eyes up bits of the business which they know are undervalued and they repackage and sell these bits on. These parts will then be sold off to repay the huge loans that the management borrowed from the bank to buy the shares in the first place.
When it has done this, the boys on the inside have the option to re-float the remaining company or sell it to a competitor in what is termed a “trade sale”. The upshot is that management make a fortune.
This is where the huge chunk of the docks which Irish Ferries have a long lease on comes in. Two other groups of investors have seen the potential of this land and are actively trying to wrestle the company from the management. In recent months Liam Carroll, the developer, has bought 19pc of the shares, presumably seeing the development potential of the docks.
Also, another consortium with the James Bond-esque name of ‘Moonduster’ has emerged with 18pc of the shares. So the management no longer has a clear run: they will have to get into bed with one of these rival investors to complete the deal.
This resulting bidding war has doubled the share price up from â‚¬12 a share to â‚¬24, which values the ferry company at an extraordinary â‚¬560m. Taken together with the â‚¬100m-odd of debt on the balance sheet and the potential buyer intends to pay close to â‚¬700m for a ferry group which valued its total assets in its last annual report at â‚¬373m.
This seems like a bizarre valuation until you throw in the Dublin Docks property. All these investors see huge future profits (more than â‚¬300m based on the mismatch between the share price valuation and the balance sheet valuation) to be made from redeveloping the docks in the years ahead.
This leads us to the future of the docks and the long-term beneficiaries of the â‚¬750m of taxpayers’ money that was forked out on the Dublin Port Tunnel.
Obviously, the investors in this corporate jamboree are factoring in two things. First, they are regarding the 100-year lease that Irish Ferries has on the docks from the State-owned Port and Docks Authority as being as good as a freehold title.
They will argue that such a long lease gives the owner full rights to do what he wishes. Secondly, they see the movement of Dublin Port to an alternative location as inevitable.
Whatever about the legalities of the first point, what about the docks themselves? Looking around Europe, the Dublin Docks are an anachronism. Practically all large cities have moved their docks out of the centre of the city years ago, freeing up the land for redevelopment.
This would appear to be the most logical way to develop Dublin, given the sprawl of the suburbs. It would be feasible to build an entire new city in the docks and move the port to a variety of suitable locations in north Dublin which could be accessed more easily by motorway. It is clear that the investors in the Irish Ferries takeover see this as a done deal.
The implications for the Port Tunnel are obvious as well. If the docks were to move, and the investors in this takeover battle end up owning a large chunk of the docks, the real beneficiaries of the State investment in the Port Tunnel will be a tiny group of already extremely wealthy investors. Because any apartment development in the docks would use the Port Tunnel in the marketing blurb as a great asset for the place, the lion’s share of the associated windfall would accrue to the land owners rather than the tunnel users. We have seen this type of carry on already with the Luas, where developers have made fortunes because of the uplift in land values as a result of State infrastructure.
Whatever way the takeover battle goes, one thing is certain, investors do not readily fork out â‚¬700m unless they are sure that they can get their money back. The only way this is possible is for high density, expensive housing in the docks. Irrespective of what the Government says, the day the Irish Ferries share price hit â‚¬25 was the day the Dublin Docks died.