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Jacob Engel´s next target: Eilat Port

Jacob Engel´s next target: Eilat Port
Along with real-estate in India and mines in Africa, Engelinvest is negotiating with Dutch and Chinese port management companies to run together for the Eilat Port Company privatization tender

By Avi Bar-Eli
14.04.2011 The marker

The first candidacy in the race to privatize Eilat Port has emerged: Engelinvest Group, owned by businessman Jacob Engel, is preparing to compete for the tender published by the government for the sale of the Port Company. The group has recently negotiated with two foreign port management companies, from Holland and China, in order to form a consortium that would participate jointly in the tender published last week. This is based on the knowledge that rating of bids in the tender would give an advantage to strategic investors in the global port business.
According to forecasts, Engelinvest believes the tender provides an opportunity to extend company activity in African ports. Through its subsidiary, Elenilto, the company is operating in ore searches and mining in Africa and holds gold, iron and copper mining franchises in Ghana and Tanzania. About a year ago, Elenilto was awarded the huge tender to purchase a franchise in three iron ore mines in Liberia. In framework of developing mining sites, Elenilto undertook to lay a railway line from the mines and upgrade a marine port through which it would market the ore to Chinese and Indian markets.

Engelinvest therefore sees Eilat port as an opportunity to extend its emerging cooperation with the Liberian port companies and opportunity to leverage its marketing relationships with Far East customers for the metal ores. This would turn Eilat port into a marine shipping base for cargo from the Mediterranean Sea to the Far East.

No conflict of interest

However, Egnelinvest's greatest advantage in the tender may stem from the component it lacks: current interest in Israeli port operations. The criteria for selecting the winning bidder have not been completely finalized yet but in view of the possibility the tender would not attract many foreign players, the government and monopoly authority may closely examine their policy with regard to allowing some of the largest maintenance companies to compete in the tender – companies that have operation synergic with port operation. This is based on the intent to ensure lack of conflict of interests in operating the port or creating cross-ownerships that would infringe on the competition among Israeli ports.

The tender published by the Government Company Authority, determines the state would sell 100% of the port shares to a private party, but would limit the port operation license (authorization) to 15 years only. Thus, at the end of the authorization period ownership of the company would be worthless – and according to a pre-determined mechanism the franchisee would return company property to the state in return for compensation against the investments put into the port throughout these years. The private owner would receive an option to extend the operation period by an additional ten years, but this would be subject to fulfilling a minimum threshold of container traffic in the last three years of ownership – with intent to encourage the new operator to develop container oriented activities in the harbor.

Not the cheapest bid

The private sector values the purchase at NIS 100-140 million. This is based on the fact that the port's profits in the last two years were NIS 15-20 million and sales of ports around the world are carried out at a profit multiplier of 7-8. Engelinvest is not expected to run into difficulties with the financing aspect: besides its increasing activities in the mining and real-estate industries, Engel himself is part to a large exit following sale of the Lagana Holdings group of companies in 2006 to Shaya Woimelgreen's Azorim in return for $100 million.

In the tender documents, the Company Authority stated it would not undertake to accept the cheapest bid, but may also take quality into consideration – in order to award priority to a foreign contender with experience in operating international marine terminals, who could leverage operation of the port in the shipping industry. Engelinvestment believes that in view of the relatively low price tag, most competition in the tender will be to prove ability to increase port activities, upgrade the service it provides and increase employment in it.

Eilat port has strategic value due to the transfer of the brunt of global marine trade from the Atlantic to the Pacific Ocean. However, the port suffers from location restrictions as the end port most distant from Israeli trade demand and supply centers, mainly suffering from the lack of a railway line connecting the Mediterranean to the Red Sea – and therefore suffers from a disadvantage compared to the shipping costs and time that are preferable when using the Suez Canal. Moreover, the port suffers from limited infrastructure, competition against the thriving Akaba port and political restrictions due to the Arab boycott. Estimates have it that future port operation will be based on export of bulk cargo to the Far East, based on higher cost shipping in trucks – expecting to realize the railway line visin from Zin River to Eilat.