Was the Chicago Deal a good one for the investor?

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Was the Chicago Deal a good one for the investor?

It is reported in the New York Times that the Chicago Parking Meter operation is pulling in one million a week and is operating on a 70% net profit margin. That’s a profit of $700,000 a week or $36.4 million a year. Sounds like a lot, doesn’t it.

I know nothing about high finance but consider this. They paid $1.15 BILLION for this deal. They are getting a return of 3.17%. I’m sure that if I had a billion dollars to loan, I could get at least what, 10% on the open market. (Morgan Stanley, the money partner in this deal, has a tax equivalent municipal bond fund that generates 11.5%. That means, I think, that the fund generates a net amount the equivalent of a normal fund that makes 11.5% and is taxed).

So Morgan Stanley could have invested the $1.15 billion in its own fund and made nearly four times what it’s making by investing in the parking business in Chicago. You might say that the income will increase over time as the rates increase, but then the income from the bond investment would compound over the years (double every seven or so years) wouldn’t it?

Can someone check my numbers and tell me where I’m off here. I realize that running a trillion dollar investment bank is different than running a tiny magazine, but something doesn’t seem to foot. I’m going to check this out with someone who knows about this stuff. I’ll check it out and get back to you.

JVH

John Van Horn

John Van Horn

One Response

  1. What everyone is also overlooking is a very important factor called risk. The City divested itself of all risk and cost associated with operating the parking meter system. For example, if gas prices shoot upward of $5, a very likely scenario given the 75 year term of the concession, driving will undoubtedly decrease. What impact will that have on the meter system? What will happen with $10 or $15 a gallon gas prices? Add risk mitigation to the savings in future escalating operating costs for equipment, maintenance, labor agreements, pensions, etc. and the City in my opinion made a very wise trade off.
    Let’s assume that the City could have done exactly the same thing as the private operator. They could have netted an additional 600 Million over and above the 1.2 Billion it received up front. Over 75 years that’s a theoretical 8 Million dollars per year that the City “gave up”. How does that stack up when one considers the risk? What is the value placed on betting that there will always be passenger cars in sufficient quantities to generate that kind of return for the next 75 years?

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