Ballard Spahr Andrews & Ingersoll had been looking to get involved with legal work involving public-private partnerships for some time and handled a few of the transactions in Miami, Alaska and Virginia.
In the fall of 2006, New Jersey’s interest in privatizing its turnpike provided a potential opportunity for Ballard Spahr to deepen that practice closer to home, public finance partner Brian Walsh said.
The firm started talks about potential representation of the state in the deal, but New Jersey’s strict interpretations of conflict of interest regulations caused the firm to step back in fear that it may be prevented from doing work for a number of financial institutions and investment firms, he said.
The group was in the process of talking with Ballard Spahr Chairman Arthur Makadon about the opportunities and frustrations of the New Jersey deal when Gov. Edward G. Rendell — a former Ballard Spahr partner — issued a request for expression of interest in the leasing of the Pennsylvania Turnpike.
“This was going to be in our backyard and we wanted to be a part of it,” business and finance partner Adrian R. King Jr. said.
Although the governor’s office probably didn’t expect to get solicitations from law firms or financial advisers, King said the firm saw it as an opportunity to be aggressive and get into the mix earlier rather than later.
Between Makadon, King, Walsh and partner Kenneth Jarin, the firm put its best case forward and found out it was retained in the matter in January 2007.
Ballard Spahr wasn’t the only firm that had the idea of getting an early start. There were five law firms, King said, that responded to the original request for information from interested parties. Mayer Brown was one of those firms, and its previous experience handling similar public-private partnership deals involving the Chicago Skyway and the Indiana Toll Road resulted in it becoming co-counsel with Ballard Spahr in representing Pennsylvania on its deal.
Ballard Spahr’s opportunity to represent the commonwealth came right around the time the firm got another offer to handle things on the opposite side of the table. King said the firm was contacted by New York counsel for one of the bidder groups about possibly joining their team, and it was then the firm decided it wanted to represent the lessor.
The concept of leasing public infrastructure is a relatively new one to the United States, and several different legal issues came into play with putting this deal
together.
The governor announced this week that a binding $12.8 billion bid was accepted May 16 from Citi Infrastructure Investors and Abertis Infraestructuras, with Criteria CaixaCorp investing alongside Abertis. The deal is subject to legislative approval.
Walsh, King and their team started in early 2007 by taking the legislation writing off the hands of an inter-agency team of lawyers.
Walsh said the issues that needed to be addressed in the legislation ranged from A to Z for a government-owned entity with 2,200 employees, more than 500 miles of roadway and several assets and obligations. He said 1,700 of the employees are part of the Teamsters Union.
The Ballard Spahr-Mayer Brown team had to deal with pension and benefits issues, post-retirement health care concerns, labor and employment issues, litigation and arbitration clauses, concerns over foreign investment into a now state-owned entity, real estate, state tax and bankruptcy issues.
The Mayer Brown and Ballard Spahr teams worked cooperatively together. While Mayer Brown handled the majority of the drafting of the concession agreement, Ballard Spahr was involved in every one of the 30 to 40 revisions and took the lead on many of the issues that dealt with Pennsylvania law, pensions, labor, sovereign immunity and arbitration, Walsh said.
Mayer Brown mergers and acquisitions partner John Schmidt said Mayer Brown was mainly responsible for the concession agreement for the first few months of 2007 until the deal was put on hold. The firm, which has been involved in every other large public-private lease deal in the country to date, has learned to structure them like a merger, he said.
The firm created a basic concession agreement for the Pennsylvania Turnpike deal that was approved by Ballard Spahr and the governor’s office and was then shown to potential bidders. The bidders were able to offer comments and all sides would discuss which comments to take into consideration, he said.
“It’s fundamentally M&A work because what you’re really doing in acquiring the right to operate a toll road is acquiring a business,” he said.
Mayer Brown was also heavily involved in the tax aspects of the deal through partner Robert Kelman because the lessee has to be viewed as an owner for tax purposes, Schmidt said.
Mayer Brown got to take a break from its work during the summer until the turnpike lease deal was back in play in September 2007, he said.
Ballard Spahr was forced to switch gears in the spring of 2007 when Rendell felt support for the lease deal wasn’t going to make it through the Legislature, King said. They started instead to work on Act 44 legislation, which proposed tolling Interstate 80 to increase revenue for infrastructure maintenance. That legislation, which ultimately passed in July 2007, required approval from the Federal Highway Administration to toll the road. The administration originally rejected the application and requested more information from the Pennsylvania Turnpike Commission, King said. The new information has not yet been submitted, he said.
Act 44 also required a lease for I-80 to be in place by Oct. 15, 2007. So the team, originally brought on to negotiate the lease of the turnpike, also negotiated a deal for PennDOT to lease I-80 to the Turnpike Commission — an entity that has not been enthusiastic about the turnpike lease, Walsh said.
Cozen O’Connor represented the commission and the I-80 lease was put in place by the Oct. 15 deadline, King said.
“In one deal we actually did two leases for highways,” he said.
In the midst of the I-80 deal, however, the bridge collapse in Minneapolis occurred in August. It gave Rendell, who was never as big a fan of the Act 44 deal, a chance to revisit the shelved turnpike lease deal, King said. So from August to October, the team worked on both deals.
If the Legislature chooses to go through with the turnpike lease deal, they would essentially repeal Act 44, he said. There would be no lingering legal issues, he said, in overriding the I-80 lease if that were to be approved by the Federal Highway Administration before the Legislature enacts legislation to lease the turnpike.
King said the approval of the I-80 toll might actually help the governor’s cause in passing the turnpike legislation because the legislators who live near I-80 have a lot of constituents who don’t want to start paying for a road that has always been free to travel upon.
If the Legislature approves the turnpike lease deal, the Mayer Brown-Ballard Spahr team would work to execute the agreement and within 90 days move to financial closing, Walsh said. In the next 45 or so days, King said the team would support Rendell’s efforts to lobby the state congress on the deal.
Making the Most of It
Most bids involving public entities are done publicly to ensure fairness and accuracy, but the turnpike lease deal was meant to be competitive and achieve the highest return for the state’s citizens. So the process was tailored to combine elements of an open and closed bid. That resulted in the state seeing $1.6 billion more than the original highest bid and the winning bidder upping its bid by $2.2 billion.
All bidders were bidding against the same concession agreement and the highest bid won, Walsh said. The deal was that if any bids were within 10 percent of the highest bid, the high bidder and the bidders within 10 percent would get one more chance to give their best and final offer, he said. The catch was that none of the parties knew if they were the high bidder or within 10 percent of that bid.
On May 9, three bidders entered their first bid, including the ultimate winning bidder Citi Infrastructure. The other two bidders were Goldman Sachs Group and Australia’s Macquarie Infrastructure Group.
Goldman Sachs had the highest original bid at $11.2 billion and Citi Infrastructure and team originally came in at $10.6 billion. At the second round on May 16, Citi Infrastructure offered the winning $12.8 billion bid and Goldman Sachs came in at $12.1 billion, Walsh said.
In order to ensure none of the bids were tampered with, two federal judges oversaw the opening of the bids. Judge John E. Jones III of the Middle District opened the bids on May 9 and Judge Michael M. Baylson of the Eastern District opened the second round of bids on May 16, King said.
Deal Details
The $12.8 billion, binding bid submitted May 16 for a 75-year lease of the Pennsylvania Turnpike would be dedicated to road and bridge repair and support 73 public transit agencies across the state. By investing the money for the long term, the lease plan would generate annual payouts for transportation over the life of the lease that the state estimates will be 13 percent more in returns than the I-80 toll plan would provide. That is assuming investment returns equal to the average earnings of the Pennsylvania State Employee Retirement System over the past 20 years.
Schmidt said this is by far the largest public-private lease deal in U.S. history, with the Chicago Skyway deal coming in at $1.8 billion and the Indiana Toll Road at $3.8 billion. He said the Pennsylvania and New Jersey turnpikes and the New York Thruway are the largest such roads in the country and would bring the highest dollar values in these types of deals.
Citi Infrastructure Investors is a division of Citi and invests in mature, core infrastructure assets largely in North America and Europe. Abertis is one of the world’s largest private toll road operators. It directly manages more than 2,000 miles of toll roads and, indirectly, another 3,000 miles in 10 countries on four continents.
Final acceptance of the winning bid will require enactment of legislation by the Pennsylvania General Assembly and will require modification of Act 44.
Morgan Stanley served as financial adviser to the commonwealth. Debevoise & Plimpton represented the winning bidder through a team, led by project finance group co-chairman Ivan E. Mattei, that included project finance partner Craig Bowman, tax department Chairman Burt Rosen, finance counsel Emilie Hsu, employee benefits counsel Alicia McCarthy and a number of associates.
The Mayer Brown team included Schmidt, Kelman, finance partner David Narefsky, regulatory partner Joseph Seliga and associates Bruce Bedwell and Jeromy Cannon.
Ballard Spahr’s team included Walsh, King, finance partners Jennifer Miller and Randall Towers, tax partner Frederic “Rick” Ballard Jr., litigation partner John Grugan and associates Steve Park and Gregory Seltzer. Other attorneys on the team included environmental partner Glenn Unterberger, labor and employment partner John McLaughlin and associate William Kennedy, benefits partner Brian Pinheiro, real estate partner Alan Ritterband, state tax partner Wendi Kotzen and bankruptcy partner Vincent J. Marriott III.
Please send any Deal Makers stories to Gina Passarella at [email protected] or call her at 215-557-2494.
