Lead contractor in new locks consortium in free fall

On July 8 of last year, after a process that had been delayed or re-started several times, bids were opened for the big contracting prize in the Panama Canal expansion project, the construction of two new sets of locks that can accommodate the large post-Panamax ships. The contract went to a consortium led by Spain's Sacyr Vallehermoso, whose shares shot up more than 12 percent on the news of its successful bid.

Panama's mainstream media mostly have interlocking directorates or other business ties with companies and individuals that have an economic stake in the canal expansion, most of them took a lot of money from the illegally government-funded "yes" campaign during the run-up to the 2006 referendum and bent their editorial policies accordingly, and reporters who took the "no" side seriously found their access to the Panama Canal Authority (ACP) cut off. Thus it was no surprise that the corporate mainstream muted or eliminated expressions of concern about the bidding for the locks. However, there are all manner of online news outlets, radio shows, foreign media and local business and social circles that fly right under the corporate media's and ACP's radar, and three major concerns about the bid did emerge one year ago:

There was the appearance of a lowball bid. Sacyr's offer was for $3.118 billion, while the next lowest, a consortium led by US-based Bechtel, was for $4.185 billion and the third bidder, a group led by Spain's ACL conglomerate at $5.981 billion. When the bids are so far apart, that's often a sign that in one way or another the contest has been rigged. The unusual extra step of the ACP paying the losing bidders $15 million each just for participating in the process added to the impression that something was fishy with the bidding.
There is a conflict of interest. Sacyr's consortium partners are the Italian engineering and construction firm Impreglio, the Belgian dredging and marine engineering company Jan de Nul, and Panama's largest construction company, Constructora Urbana SA (CUSA). CUSA is owned by Panama Canal administrator Alberto Alemán Zubieta's relatives, and before he became canal administrator Alemán Zubieta was the company's CEO. But the ACP argues that because the administrator sold his personal shares, there is no conflict of interest.
Sacyr Vallerhermoso was at the time in such bad financial shape that there were questions about whether it was in a condition to perform the contract. Formed by a 2003 merger between Vallehermoso, a company that specialized in road building, and Sacyr, at the time Spain's sixth-largest construction and engineering firm, the combined company went on a major acquisition binge, consolidating its position in Spain's construction business, investing in energy companies and amassing a huge debt. By the middle of last year Spain's upscale condo market, to which Sacyr Vallehermoso was heavily committed, was going soft.

For Sacyr, which even after getting the Panama Canal contract does 79 percent of its business in Spain, the contract looked like salvation. As the British magazine The Economist put it, "This is a trophy deal for Sacyr, and relief from problems in its home market."

Well, maybe it is. But there has been little change in Sacyr's net debt in the past year --- at $14.26 billion, it owes more than the Republic of Panama does.

The hike in Sacyr's share prices carried into the early fall, when it peaked at $16.09 per share. Then the shares went on a downward glide path, which steepened with the onset of the European financial crisis. At the close of business in June 30 Sacyr shares were selling for $4.97. That's about a 68 percent decrease in share price, and if one wants to go back to the company's peak in the fall of 2006, its shares have lost more than 90 percent of their previous value.

Although about one-half of the digging for the new Gatun Locks has been done and the approaches to the new Pacific side locks are similarly advanced, construction on the locks themselves has not begun. They're just beginning construction on the huge cement mixers that will be used to pour the concrete for the new locks.

Share price does not equal cash on hand, and both companies and individuals who are saddled with debts that they can never hope to pay down sometimes remain quite productive. Moreover, at least until the sharp European downturn Sacyr was reporting its numbers in black ink, logging a 2.56 percent profit margin for the first quarter of this year. But at a certain point, liabilities way above assets will equal bankruptcy and along the way to that destination it becomes difficult or impossible for a business to borrow money.

So the question again arises: will the consortium led by Sacyr Vallehermoso be able to perform its canal expansion contract at the agreed price?

economy