THE BUYING GAME
Simon Morris, vice president at ICF International, reviews some of the major airport transactions of last year and speculates what deals could be in store for 2020.
Last year confounded the airport transaction pessimists with a high volume of good quality assets sold at healthy prices.
And, although secondary sales predominated, there were nonetheless some high profile primary transactions.
In common with other sectors, buyers by far outnumbered sellers, and capital continued to flow into infrastructure funds. More than $33 billion had been raised by European infrastructure funds by October 2019, for example.
Individual fund targets were broken by a number of institutions. Additionally, strategic players and private equity joined the search for equity investments.
Airports continue to be sought after assets based on a combination of strong infrastructure characteristics together with the growth profile associated with air transport. In the context of this wall of money chasing assets, each buying proposition, including more problematic opportunities attracted many interested bidders.
The latter half of 2019 saw a slow-down in airport performance indicators – noticeably in traffic growth. Indeed, by November 2019, year-on-year passenger growth at European airports had slowed to 1.7%, while cargo registered its 13th consecutive monthly decline. However, to date, the trend has done little to dampen the appetites of potential investors.
Transaction hot spots
Although there was activity in the Americas and the Far East in 2019, the bulk of transactions occurred in Europe and India, as discussed on the following pages.
In Europe, Macquarie funds sold 36% of its stake in Brussels Airport to a consortium of QIC and APG following a keen competition attracting high quality consortia mixing local and international interests. A repeated theme in the due diligence process was the
future of Brussels Airlines, given its parent Lufthansa’s announcements about its future role.
Further south, a majority stake in Toulouse-Blagnac Airport was sold by Chinese interests to French concession company Eiffage. Completion of this transaction was delayed by a court case challenging the original basis of the primary privatisation, but that issue has now been resolved.
A court case has also threatened completion of the sale of Sofia Airport to a consortium including Meridiam, Munich and Strabag, although this is expected to be resolved in early 2020.
Meanwhile, a consequence of GIP’s 2018 sale of 50.01% of Gatwick to VINCI Airports was the sale of the remaining 49.99% to a continuity fund.
Lastly in Europe, an eye-catching transaction was Macquarie’s purchase of Farnborough Airport from TAG. Farnborough is a business aviation airport and clearly benefits from capacity constraints in the London system currently squeezing business aviation from other London airports
Elsewhere, the civil enclave at Paine Field in Seattle was sold by private sector interests to GIP Cascade. Hobart Airport was sold by Macquarie funds to QIC/Schiphol, while in Japan a consortium of DBJ, Mitsubish and Tokyu became the preferred bidder for the Hokkaido group of airports.
India continued to be a country of significant focus. A consortium of ADIA/NIIF and PSP became preferred bidders for a majority stake in GVK, owners of Mumbai and Bengaluru-Kempegowda airports. Clearly, GVK’s success in becoming the concessionaire for Navi Mumbai played a role in the appraisal of that stake.
Meanwhile, Adani became preferred bidder for a group of six Indian airports of which the largest is Ahmedabad’s Sardar Vallabhbhai International Airport. Lastly, late in the year, Zurich Airport became the preferred bidder to develop a greenfield airport in Jewar, which will become a secondary airport for Delhi.
It is difficult to pick out a common theme from the 2019 transactions. A very diverse group of investors seized scarce opportunities among secondary sales, greenfield airports and one-off situations such as Paine Field.
Each opportunity was highly competed and, as is usual, the commentariat worried about unsustainable prices. For example, the price paid for Jewar, an unbuilt airport at a geographical and market disadvantage to the existing Delhi-Indira Gandhi International Airport appeared high in absolute terms, and also relative to Adani’s price paid for regional airports earlier in the year.
But the growth of air travel in India appears inexorable and provides a basis for increasing valuations.
So, what of 2020? Our expectation is for a mixed bag of transactions with several expected deals failing to complete as is invariably the way. Interesting deals could happen in Barbados, Italy, Japan, Brazil and the Philippines, but for our money the likely highlights are:
Athens International Airport
Following the original privatisation, the Greek government has, through its agency the Hellenic Republic Asset Development Fund, retained a 30% stake, intending to sell it once the original concession has been extended. Now that the extension has been achieved, a sale process is underway.
The responders to the Request for Qualification (RFQ) typify the range of current investors in airports: AviAlliance, First State Investments, VINCI Airports, Groupe ADP, Ferrovial Airports, Ardian, GIP, APG, KKK/Egis Airport Operation and a Macquarie led consortium that includes CIC and Raffles Infrastructure Holdings.
The airport’s success in growing traffic is likely to trigger relatively significant capital expenditure requirements over the coming years – and the pattern of recovery of these costs under Athens’ unique dual till return on equity approach will be a key due diligence point.
Nantes Atlantique Airport
This concession has arisen from the cancellation of the project to develop a new gateway for Nantes, Notre-Dame-des-Landes Airport. As a result of the decision, it has been decided to redevelop the existing airport (Atlantique) under a new concession with a requirement to invest €450 million on airside and landside improvements over the next five years.
VINCI Airports holds the concession to operate Atlantique and the smart money must be on their winning the revised concession, however, a competitive process is expected.
Beirut Rafic Hariri International Airport
The Lebanese government, working with IFC, are nearing the launch of a PPP for Beirut’s Rafic Hariri International Airport. This will entail the development of the airport, including a significant expansion to the current terminal.
Given Lebanon’s strong political links with France, it is expected that the very vigorous French concession sector (Bouygues, Egis, VINCI, Groupe ADP) will consider becoming involved, but the opportunity is likely to be attractive more generally.
Not on the radar in 2020
One airport that that definitely won’t be on the market this year despite expectations that it would be 2020’s marquee transaction is St Louis Lambert International Airport, after St Louis Mayor, Lyda Krewson, abruptly cancelled the privatisation process in December 2019.
Her unexpected decision looks to have finally signalled the end of a long journey for the airport which was mentioned as a hot prospect by myself in the 2010 version of Airport World’s annual ‘Buying game’ feature.
We understand that unlike in previous privatisation attempts, this time round the airlines had reached a pre-agreement over user charges with the city, potentially clearing a major obstacle to the concession. However, that did not appear to be enough to provide the process with momentum.
Interestingly, each of these highlights (and also the other airports we see in the pipeline) are primary privatisations – in other words, transfers of equity from governments to the private sector.
This reverses a trend of recent years where new privatisations have been few and far between and the main activity has consisted of the churn of existing stakes.
Our feeling is that, as we observe from the deals reported above, to acquire an airport stake is extremely hard work and funds are reluctant to churn them. This is even the case with closed end funds. Therefore, it could be that secondary sales are becoming collectors’ items.
In contrast, governments have promoted all of the deals itemised above on the basis of relatively imminent investment needs and, in our view, this is likely to influence the profile of the winners of the 2020 processes – successful bidders will need strong construction and development skills whereas access to upfront equity is likely to be less significant.