An attempt by Conservative mayor Ben Houchen to secure control of a UK ports company risks thwarting the investment behemoth Brookfield Asset Management’s hopes of selling the asset for as much as £2bn, in an auction that pits one of Boris Johnson’s closest allies against a leading global infrastructure company.
Houchen, whose election as Tees Valley’s Tory mayor in 2017 marked him out as a key figure in Conservative efforts to make inroads into Labour’s heartlands in northern England, wants to gain control of PD Ports, which runs Teesport. PD Ports is owned by Brookfield, which has put the asset up for sale.
The move by Houchen dovetails with his plan for a government-backed freeport that would aim to regenerate much of Teesside following deindustrialisation that culminated in the closure of the area’s last steelworks at Redcar in 2015.
The prime minister is pushing freeports as a post-Brexit innovation to “level up” left-behind areas because these economic zones are meant to support advanced manufacturing and high-value jobs. A freeport is a low-tax area considered to be outside the UK for customs purposes, meaning that goods or components can come in tariff-free, although they may incur duties when exported.
Houchen wants his 4,500-acre Teesside freeport to focus on industries including offshore wind power, other clean energy and chemicals, and to create more than 18,000 jobs.
Securing control of Teesport, the UK’s fifth-largest port that has a 2,400-acre site, would be a major addition to the freeport project led by South Tees Development Corporation, which Houchen chairs.
But the corporation is far from assured of gaining control of PD Ports: several companies are interested in buying it from Brookfield, including Peel Ports, the UK’s second-largest ports group, and Macquarie, the Australian infrastructure bank.
Moreover, the corporation appears unwilling to pay the £2bn that Brookfield is hoping to obtain for PD Ports. “It’s not worth £2bn,” said one person involved in the corporation’s bid. “Bids in the £1.1bn to £1.4bn range are far more realistic,” added this person.
Brookfield, which has more than $625bn under management, according to its website, is a huge presence in the global investment industry. It is one of New York’s largest commercial landlords and its name adorns the skyscrapers of Canary Wharf in London and Potsdamer Platz in Berlin.
Houchen, however, has power and influence as an ally of the prime minister. He won a second term in office at an election in May, and his Teesside regeneration project is arguably the government’s flagship freeport plan: ministers authorised eight such proposals in England in March.
Furthermore, Houchen has a track record of intervention, notably leading a move in 2018 to buy Durham Tees Valley airport from Peel Airports and place it in public ownership.
The bidding war for PD Ports is complicated by how the South Tees Development Corporation is suing the company over its rights to use two of three access routes into Teesport.
While the lawsuit would not affect the main thoroughfare, the corporation wants to prevent PD Ports from using the two other routes.
The corporation is carrying out demolition and regeneration work and it would be “dangerous and overly disruptive” for PD Ports to keep using the routes, it said in court documents filed in March.
But PD Ports accused the corporation in documents filed in May of using the lawsuit “to extract a ransom discount” so it can buy the company on the cheap. The corporation denied this in June, saying that the allegation is “ill-informed and irrelevant”, further documents show.
Bidders for PD Ports have already submitted first-round, non-binding offers, but it is not clear whether they will translate into the sums that Brookfield is seeking in the auction.
PD Ports will generate £75m of earnings before interest, tax, depreciation and amortisation in 2021 if current market conditions continue, according to an auction document shared with potential buyers.
A sale for as much as £2bn would therefore value the company at a hefty multiple of 27 times annual earnings.
Brookfield acquired PD Ports at a valuation of £307m in 2009, shortly after the financial crisis. While 90 per cent of PD Ports’ core earnings come from Teesport, it has 11 other sites, including ports and warehouses in the east and south-east of England.
A person close to Peel Ports said any deal valuing PD Ports at between £1.5bn and £2bn would risk becoming a “millstone” around the group’s neck, and expressed wariness at the implications of the lawsuit involving Houchen.
“Those factors are hindrances to progressing with the opportunity,” added this person, saying that Peel Ports is not “filled with glee” at “the prospect of spending a year or two battling the mayor”.
Peel Ports has not pulled out of the auction, however, and the group is likely to decide on its next steps soon.
Macquarie has signalled to the South Tees Development Corporation that it is not keen to get in its way, said a person with knowledge of the matter, although the company remains in the auction. “They will only put in a bid if they know relations will be smooth with the mayor,” added this person.
Final, binding offers for PD Ports are due in mid-November, and it is possible that other unknown bidders may be interested. Brookfield, Peel Ports, Macquarie, Houchen and the South Tees Development Corporation declined to comment.
Like chancellor Rishi Sunak, Houchen has long championed freeports, which critics claim will simply shift investment and jobs around the country, rather than create new business.
If the Tees Valley mayor is successful in purchasing PD Ports, possibly through a public-private partnership for which Northumberland Estates and the Pension Insurance Corporation have been lined up as potential backers, the South Tees Development Corporation is hoping that the acquisition will serve to cut red tape and create more jobs at the proposed freeport. Northumberland and PIC declined to comment.
But should Houchen lose out in the auction, his regeneration plans will be slower and more expensive, according to people familiar with his thinking.