Tuesday, August 11, 2009

Carlyle's Ports Proposal: Yes Virginia, There is a Santa Claus!

The Carlyle Group submitted a conceptual proposal to lease the Port of Virginia for 60 years. The Old Dominion undertook a bidding process after an unsolicited proposal by CenterPoint Properties in March. Goldman Sachs is involved in another competing bid.

Carlyle's conceptual proposal starts off with their "commitment to Virginia":

Headquartered in Washington, D.C., Carlyle is a global private equity firm situated locally. Over 150 Carlyle employees and their families live in the Commonwealth of Virginia (the “Commonwealth”), including two of its three founders, Bill Conway and Dan D’Aniello. Glenn Youngkin, a member of Carlyle’s operating committee, grew up in Richmond, Virginia and currently resides with his family in northern Virginia. As such, Carlyle has a direct and strong constituent interest in the economic development of Virginia. In addition, Carlyle’s portfolio of companies includes Virginia companies such as Booz Allen, which has over 12,600 employees at its headquarters in McLean, Virginia. In the mid‐Atlantic region, Carlyle portfolio companies have over 25,000 employees in businesses that are among the leaders in the industrial, aerospace, and consumer sectors.
It then goes on to highlight Carlyle's strong interest in infrastructure:
Recognizing the interrelatedness of the North American freight transportation system, Carlyle has made infrastructure assets in this area a priority in its infrastructure fund. Carlyle Infrastructure Partners was established in 2006 to focus on private equity investments in infrastructure primarily in the U.S. and Canada.
The proposal included:
"Carlyle is interested in entering a long‐term (60 years +) concession of VPA’s Port Facilities including Craney Island."
Carlyle would acquire the current operator of the ports, Virginia International Terminals (VIT).

"Given VIT’s long operating history of the Port Facilities and its familiarity with the shippers and the contracts, we believe VIT is best positioned to continue to operate the Port Facilities with no disruption to the operations of the local maritime community. While we considered the possibility of contractually retaining VIT as the operator, Carlyle believes that the most efficient way would be for VIT to become a wholly‐owned subsidiary of the Concessionaire"
Carlyle won't take over all functions.
The Virginia Port Authority(VPA) "would continue to be a public sector entity with the primary role of monitoring, providing security, and promoting general economic development...We assume that VPA can consolidate much of its staff into VIT for this process and that very little staff will necessarily remain at VPA. However, to maintain the necessary staff for the remaining functions, we intend to provide the VPA with an annual, inflation indexed cash flow stream."
After garnering the Port's operational expertise for a sixty year period, what happens?

"At the end of the concession period, VPA would get the terminal assets back, but not the VIT operating company. The Commonwealth and VPA would need to either contract for continuing operations at that time, or enter into another concession for the Port Facilities at that time."
Private equity underwriters brag about their ability to raise investment funds for projects. How does this expertise come into play?

"...We believe that the Commonwealth and the Federal Government will need to provide much of the capital required to prepare the site for a terminal."
Back to Carlyle's connectedness:
"When discussing long term strategy of the Port Facilities, it is essential to mention Carlyle’s commitment to a continuing partnership with the U.S. Navy, the U.S. Coast Guard, the Department of Defense, and other critical federal agencies that have operations in and around the area."
They close with financial terms which show a range of $500-700 million initial payment and profit sharing which increases as Carlyle's internal rate of return goes up. Yet, there is a qualifier to this "bid".

Many assumptions remain undecided, and many arrangements remain un‐assumed in this calculation. As a normal practice, submission of a “detailed proposal” as contemplated under the PPTA guidelines is subject to completion of due diligence and prior approval of our investment committee.
In other words, Carlyle didn't respond to a request for proposal that enables an apple to apple comparison. The state didn't require it.

Unsolicited proposals must "generally meet the quality control criteria established by the Commonwealth for Public-Private Transportation Act proposals" and "generally address the applicable goals, principles and priorities of the Commonwealth relating to the Port of Virginia."
This enables Carlyle to pull their usual connections, keeping the taxpayer on the hook during the deal and at serious risk when the lease expires. Carlyle co-founder and Northern Virginia resident Bill Conway hates a level playing field.

Yes Virginia, there is a Santa Claus and his name is Pierce Homer, Secretary of Transportation.