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Trading airports - value indicators Jan/Feb 2013 Download PDF

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In January Heathrow Airport Holdings (formerly BAA) announced agreement to sell Stansted Airport to Manchester Airports Group for £1.5bn. This was the last of the disposals required by the UK's Competition Commission (formerly the Monopolies and Mergers Commission) following its report into BAA's ownership of UK airports in 2009, and now leaves the UK with three main groups in charge of nearly 70% of the country's airport passenger business (compared with BAA's control of 63% of traffic prior to the break-up).

The achieved price must have been pleasing to Heathrow and its Ferrovial-led consortium of owners, in that it reflects a 15% premium to the airport's regulated asset base (RAB) in spite of Stansted's reliance on Ryanair (about 73% of passenger throughput).

At the reported price it reflects over 17x enterprise value to earnings before interest tax and depreciation (EV/EBITDA) - a little above the valuation that the Ferrrovial consortium had placed on BAA itself when it acquired the airports group in its £10bn hostile take-over in 2006. It was also not far from the valuation achieved in the sale of Edinburgh last year and significantly higher than the valuation on the forced sale of Gatwick in 2009 (when BAA then had to recognise a £130m loss on the sale).

The other losing consortia in the bid for Stansted – led by HRL Morrison (the New Zealand-based investment fund), TPG, Macquarie and Malaysia Airports - by all reports were not willing to pay above the RAB. In the end it appears that MAG was the only bidder. MAG had perhaps been seen as the favourite but the fact that it was willing to pay the premium suggests that it really wanted to acquire London's third airport.

The MAG bid is somewhat unusual. Its partner is Industry Funds Management - an Australian based fund manager with over A$11bn in infrastructure investments worldwide (including inter alia Brisbane, Melbourne, Adelaide and Northern Territory airports in Australia along with Anglian Water in the UK). Following the successful bid for Stansted, IFM will acquire a 35% stake in Manchester Airports Group (giving it 50% voting rights alongside Manchester City Council's 35% equity stake, the other local authority holdings of 30% effectively disenfranchised) supposedly putting up all the cash required for the bid for Stansted. It is more unusual in that last year MAG hired as Chief Commercial Officer Ryanair's former Route Development Director Ken O'Toole; possibly in anticipation of its bid for Stansted.

Following the completion of the sale of Stansted (possibly by March) the UK's airports will be dominated by three groups: Heathrow Airport Holdings (London Heathrow, Southampton, Aberdeen and Glasgow) with 31% of traffic; Global Infrastructure Partners, GIP, (London Gatwick, London City and Edinburgh) with 20% of traffic; and Manchester Airports Group (Manchester, East Midlands, Bournemouth and London Stansted) with 18%. The next largest groups are the former TBI, owned by Albertis and AENA, (Belfast, Cardiff, London Luton) with 6%, and Birmingham with 4%. Given the change of name from BAA to Heathrow Holdings (following the sale of Stansted, Heathrow will make up 95% of the business), and the de-emphasis of the holdings in Glasgow and Aberdeen there is speculation over whether the other non-Heathrow assets may also be being considered for sale.

The BAA break up.
    £m £m
Jun 2006 BAA Acquisition   £10,000
Select Asset disposals  
May 2007 Budapest -£1,309  
Nov 2007 Australian airports -£347  
Mar 2008 WDF -£547  
Mar 2008 APP Lynton properties -£133  
Oct 2009 Gatwick -£1,500  
Apr 2010 APP Lynton -£244  
Apr 2012 Edinburgh -£807  
Jan 2013 Stansted -£1,500 -£6,386
  Net purchase price ?   £3,614
Source: Ferrovial, BAA, Press reports.

The Ferrovial consortium originally acquired BAA in 2006 for £10bn reflecting an EV/EBITDA ratio of over 16 times. The consortium at the time consisted of Ferrovial with 55%, Caisse de dépôt et placement du Québec with 26% and Singapore's GIC with 18%. By the time the sale of Stansted is completed next month, the consortium will have disposed of assets to the tune of £6.4bn. Ferrovial sold a stake in the ultimate BAA holding company to US based Alinda Capital to reduce its holding below 50% at the end of 2011 (allowing it to deconsolidate BAA from its accounts, and paving the way for BAA to pay a dividend of £240m in 2012 to the ultimate shareholders). At the end of 2012 the consortium realigned shareholdings further. As a result Ferrovial reduced its stake to 33%, CDPQ to 13%, and GIC to 12% by selling shares to Alinda (now 11%), a 20% stake to Qatar Holdings and 10% to Stable Investment Corp (part of China's sovereign wealth fund). The transactions apparently implicitly value Heathrow Holdings at £4.5bn and on an EV/EBITDA multiple of a mere 7.2 times.

GIP also, shortly after completing the acquisition of Gatwick at the end of 2009, started selling stakes in the airport as part of a policy of equity syndication and debt refinancing of the original purchase price. It now owns a minority 42% (but retains management control); Abu Dhabi (ADIA) 15%, National Pension Service of South Korea 12%, Californian State Pension Fund (CalPERS) 13% and Future Fund (Australia's sovereign wealth fund) 17.2%.

The change of ownership that put the three main London airports in separate hands is likely to intensify the debate of the possible expansion of runway capacity in the South East of England (see Aviation Strategy November 2012). The Department for Transport published its latest air passenger forecasts in January. In this it further reduced its long range forecasts of demand to between 1% and 3% a year on a constrained basis (i.e. assuming no additional new runway capacity) compared with historic rates of growth nearer 5% a year. Heathrow is already full: its two runways are already operating at capacity and ACL reports show that there is substantial demand for access in excess of capacity limits.

Under the central scenario the DfT assumes that Gatwick with its single runway will be operating at full capacity by 2020; and by 2030 all of the London airports will be full - even including London Southend. The impacts of the lack of runway capacity intensify through the period of the DfT forecasts so that by 2040 its central scenario shows UK air passenger demand some 10% what it would otherwise forecast on an unconstrained basis. Inherent within the DfT forecasts is an assumption of spill away from London's South East to other regional airports. This it no doubt feels would be greatly helped should the UK's High Speed rail line to Birmingham and Manchester (HS2) actually be built and start operating in the mid 2020s; Birmingham Airport would become closer to London in travel time than Stansted currently - even though the DfT in its central constrained scenario forecasts that Birmingham also will be operating at capacity sometime during the 2030s.

Meanwhile in January the Westminster Energy, Environment & Transport Forum held a seminar subtitled “time for a third runway at Heathrow?” Unsurprisingly there were a lot of vested interests represented in the audience; but in contrast to attitudes only a few years ago less than half the audience on a show of hands were in favour of the question (although that was more than twice the number in favour of a new estuary airport). In the end it will be for the Davies Commission to propose a remedy, and the next UK Government to decide; but if the proposal were to suggest a new runway at one of the existing London airports, it will be these three groups competing against each other to spend the billions necessary. Stewart Wingate (CEO of Gatwick) mentioned at the forum seminar that the investment for a second runway at Gatwick could run to £10bn - a substantial multiple of the company's current size - and would not be likely to come into operation until the mid-2020s. The cost may be similar at Heathrow, although closer to that airport's RAB, and perhaps nearer £5bn for Stansted, more than three times that airport's current asset base. Only one group, he said, would be able to afford the investment.

Valuation trends

The chart below shows an updated view from our database of airport transactions which we last published in Aviation Strategy August 2009. After the fire sale of Gatwick in 2009 (which seemed to have brought airport transaction values down from the bubble of valuations prior to the financial crisis) there was a dearth of transactions (at least with publicly available transaction prices) until 2012.

At the beginning of last year Brazil kicked off a privatisation plan with the sale of three airports: São Paolo, Viracopos and Brasilia. The first two of these seem to have attracted successful bids at values of over 30 times EV/EBITDA (Brasilia's ratio was off the chart at over 70x) - and the state achieved a total sale price of over $14bn (more than three times the minimum asking price). These sales however were somewhat unusual - and the prices involve payments over the concession periods while in partnership with the state-owned operator Infraero - and the valuations achieved may have far more to do with the state of the Brazilian economy (along with euphoria over Football World Cup and the next Summer Olympics) than the real world.

The other major trade sale transactions in 2012 have had far more respectable achieved values, well down from the pre financial crisis bubble and closer to the averages seen for trade sales in the previous decade. Edinburgh was sold to GIP in early 2012 on a multiple of 16.2x; Puerto Rico was sold (although still subject to FAA approval under the FAA privatization program) at a similar multiple to Aerostar (a consortium of Mexican Airport ASUR and Highstar Capital); the Portuguese group ANA went to Vinci airports for just under 16x, despite continuing question marks over the future of Air Portugal; and now Stansted at 17x to Manchester Airport Group despite Ryanair. A good price but perhaps not overvalued.

The BAA break up.
    £m £m
Jun 2006 BAA Acquisition   £10,000
Select Asset disposals  
May 2007 Budapest -£1,309  
Nov 2007 Australian airports -£347  
Mar 2008 WDF -£547  
Mar 2008 APP Lynton properties -£133  
Oct 2009 Gatwick -£1,500  
Apr 2010 APP Lynton -£244  
Apr 2012 Edinburgh -£807  
Jan 2013 Stansted -£1,500 -£6,386
  Net purchase price ?   £3,614
THE BAA BREAK-UP
THE BAA BREAK-UP
        £m £m  
  Jun 2006 BAA Acquisition     £10,000  
  Select Asset Disposals        
  May 2007 Budapest   -£1,309    
  Nov 2007 Australian airports   -£347    
       
  Mar 2008 WDF   -£547    
       
  Mar 2008 APP Lynton properties   -£133    
       
  Oct 2009 Gatwick   -£1,500    
  Apr 2010 APP Lynton   -£244    
  Apr 2012 Edinburgh   -£807    
  Jan 2013 Stansted   -£1,500 -£6,386  
    Net purchase price ?     £3,614  
  Source: Ferrovial, BAA, Press reports.      
       

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