DP World gives up on U.S. terminals
Two days after buying a British port management firm for $6.8 billion, the government of Dubai bowed to political reality Thursday and gave up plans to operate the U.S. portion of the business as potential suitors quietly considered making an offer for two dozen terminals and cargo handling operations on the East and Gulf coasts.
State-owned Dubai Ports World announced it plans to sell the U.S. facilities to an American company after an overwhelming 62-2 vote in the House Appropriations Committee Wednesday to block the deal on national security grounds made it clear that President Bush would not be able to override a veto and approve the deal. Republican leaders visited President Bush at the White House to tell him that the deal was dead on Capitol Hill.
The decision is a significant defeat for President Bush, who faced a mutiny within his own Republican party on the deal. While Dubai’s retreat saves the administration further political damage on an issue that was widely unpopular with the American people, it is likely to come under renewed fire for not moving fast enough to plug gaps in maritime security at facilities still considered vulnerable to terrorists.
“DP World will transfer fully the U.S. operations of P&O Ports North America Inc. to a United States entity,” Chief Operating Officer Edward Bilkey said in a statement. “This decision is based on an understanding that DP World will have time to effect the transfer in an orderly fashion and that DP World will not suffer economic loss.”
Opponents of the takeover of terminals in six major U.S. ports and other locations voiced concern that the company could not be trusted to prevent terrorists from infiltrating U.S. ports. Many lawmakers argued that ports are critical infrastructure that should be owned and operated by U.S. firms, despite the fact that at least three-quarters of U.S. container terminals are owned by foreign companies. DP World acquired the facilities from London-based Peninsular and Oriental (P&O) Steam Navigation Co.
In the statement, DP World said Sheikh Mohammed bin Rashid Al Maktoum made the decision to relinquish the U.S. properties in order to preserve strong relations with the United States.
The statement leaves some uncertainty as to whether DP World has decided to divest the U.S. business, give up management control to a subcontractor, or set up an American-owned subsidiary.
It did not rule out the possibility of owning a U.S.-managed and based company. When Danish shipping line Maersk purchased Sea-Land Services in the late 1990s, it created a separate shell company for the U.S.-flag vessels that operated in the Maritime Security Program to comply with U.S. corporate citizenship rules. MSP is a program that provides the Defense Department with military useful container and roll-on/roll-off vessels during times of war or national emergencies. That business is reserved for U.S. companies.
Congressional opponents of the sale said they were guardedly optimistic DP World planned to completely severe its stake in the U.S. operations, but were waiting to see the details.
“I’m told it will be a complete sale and if that’s the case, I can’t imagine it not answering the problem,” Reuters quoted a senior administration speaking on condition of anonymity.
A couple of compromise proposals floated earlier this week by members of Congress called for DP World to hire a U.S. company to operate the terminals, but allow it to retain ownership.
But an official at the United Arab Emirates embassy in Washington said the government has decided to divest its assets, according to Bloomberg News.
The statement also appears to leave the door open to the U.S. government buying the terminals from DP World if can’t find a buyer on its terms.
DP World did not indicate whether it has a buyer in hand yet, but speculation centered on several U.S. companies with terminal operations as well as private equity investors.
The only company that has publicly expressed interest in buying some or all of the P&O Ports North America operations is Eller & Co., the Fort Lauderdale-based stevedoring company that filed suit and spurred Congress to block the deal. Eller subsidiary Continental Stevedoring & Terminals provided the labor to load and unload ships at a terminal in Miami under a joint venture with P&O. Eller fought the sale to Dubai Ports World, saying it was being made an involuntary partner of a company that posed a threat to port security because of possible ties to terrorists. Eller pushed Congress to block the deal and force P&O to sell the domestic operations to an American company.
The North American operation only accounted for 6 percent to 10 percent of P&O’s business, and has an estimated value between $500 million to $700 million based on the $6.8 billion price DP World paid for the company. Many analysts say that DP World overpaid for the company by 20 percent in its bidding war with Singapore-owned PSA Corp.
Eller is a relatively small terminal operating company, with stevedoring and agency activities in a few Florida ports. Joseph Muldoon, an Eller representative, has said the company would consider many options, including being part of a group of investors to buy the P&O terminals.
Reached on his cell phone Thursday, Muldoon said, “Eller’s here. We’re available.”
Seattle-based SSA Marine, the largest U.S.-owned container terminal operator is also working to expand on the East and Gulf coasts, but a spokesman declined to comment on whether the company had approached DP World to take over its port leases.
“We look at opportunities on a project by project basis,” said Bob Waters, SSA spokesman.
SSA has a joint venture with P&O Ports called Delaware River Stevedore in the ports of Philadelphia, Camden, N.J., and Wilmington, Del., and planned to assume the same relationship with DP World.
SSA also handles cargo in the ports of Charleston, S.C.; Jacksonville, Fla.; and Savannah, Ga. It is trying to build its own port in South Carolina in partnership with Jasper County, but the South Carolina State Ports Authority has sued to block the Savannah River development because it says it has the sole right to operate ports in the state. The port authority operates the Port of Charleston. A state judge has heard the case, but has yet to issue a decision.
SSA is also privately financing and building a $250 million container terminal in Texas City, Texas.
APM Terminals North America Inc., the port operations arm of Danish ocean carrier Maersk Group, also is pursuing expansion in the United States, as evidenced by the $450 million terminal the company is building in Norfolk, Va., and has the deep pockets and experience to takeover the P&O operations.
APM, based in Charlotte, N.C., is the largest container terminal operator in North America. The company is a U.S. entity under the law, but it remains an open question whether the company would prefer to keep its head low after the political uproar about foreign companies operating U.S. port facilities or whether politicians would even accept such an arrangement.
APM shares the Port Newark container terminal with P&O Ports.
Maher Terminals is the largest marine terminal the Port of New York and New Jersey, but doesn’t have any other facilities in the United States. Maher announced in November that it was looking for an investor to joint the company as a minority partner, raising questions about whether the company has the wherewithal to bid on the DP World assets.
Some press accounts indicated that private equity firms have contacted DP World about acquiring the U.S. terminals, but American financial institutions have been reluctant for many years to invest in the U.S. maritime industry.
Operating terminals and cargo vessels is a very capital-intensive business that is now dominated by foreign companies with longer investment horizons. The pressure from Wall Street for quick returns and higher tax laws in the United States gradually forced American companies to get out of the business. For similar reasons, and because of the higher cost of American crews, the U.S. merchant fleet also largely disappeared. Foreign companies that dominate the carrier industry also operate many terminals to service their vessels.
The Carlyle Group, a powerhouse equity firm with ties to the first President Bush and previous transportation investments such as Horizon Lines, is not interested in buying DP World’s terminals, spokesman Chris Ullman said.
Although, popular opinion was heavily tilted against the port sale to DP World, some prominent U.S. newspapers continued to back the sale on its merits and criticized Congress for using scare tactics to whip up public sentiment against the deal.
“PROTECTIONISTS, REJOICE! The dastardly United Arab Emirates company that would have presumed to unload containers of underwear and toothpaste on U.S. soil has backed down, and it will now divest its U.S. port interests to an American entity. Rest assured, the nation is now safe from dangerous Middle Eastern accountants and port logistics specialists,” read the Los Angeles Times editorial.
In an editorial titled “Happy Now?” the Washington Post said, “they spend drunkenly, they fail at oversight and they can’t stop the administration from abusing detainees or tapping phones,” but now “our brave new Congress has achieved more than the irrational spiking of one business deal. It has also sent a clear message to the Arab world: No matter how far you move along the path of modernization and cooperation, Americans may be unable to distinguish you from al-Qaeda.