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ECONOMICS Last modified on November 23, 2015

The buying game

LeighFisher’s Andy Carlisle takes a look at the airport transaction market and predicts some of the possible deals of 2016.

The airport transaction market has slowed in 2015 and deals have consistently taken a long time to come to market and reach financial close.

However, the airport industry’s growing need for capital, pressures on government finances, and infrastructure investors seeking higher yield investments are likely to continue to drive new deals across the market in 2016.

 

A tripartite market

Airport transaction activity is increasingly global in nature, and this has created greater diversity in the deals conducted. Generally, transactions are of three types:

  • Privatisations
  • Public-private partnerships (PPP)
  • Secondary market transactions

 

Privatisation – public capital raising

Airport privatisation dates back to the original sale of BAA in the late 1980s, which drove the original wave of transactions. 

It is usually defined as the government sale of a state-owned asset on a freehold or concession basis to raise funds. This can be for a minority or majority shareholding and the valuation of the asset is the prime consideration of the deal.

Europe has been at the forefront of airport privatisation activity, as many airports in the UK, and some in Italy, Belgium and Denmark have been sold or partly privatised in the past 25 years.

Economic difficulties have prompted recent airport privatisation activity in France, Greece, Italy, Slovenia, Portugal, and Spain.

Conversely, we have also seen a number of regional airports returning to public ownership or being closed. This raises intriguing questions about the commercial resilience of the business models of airports that have a weak local catchment area and/or operate in a highly competitive market.

Looking ahead, the most significant airport transactions are expected to be further French regional airport privatisations with Nice Côte d’Azur and Lyon-Saint Exupéry expected to come to the market by 2016. 

The privatisation of Osaka’s Kansai and Itami international airports in Japan was delayed and only one bidder was shortlisted. There was a lot of international interest, however, and it may still prove a catalyst for more privatisation in the region and lessons
learned may improve future competition.

Elsewhere, the Serbian government is expected to privatise Belgrade Nikola Tesla Airport and the Greek government’s remaining 55% shareholding in Athens International Airport is likely to come to the market in 2016. 

Given the obvious concerns for many investors from investing in Greece, a deal with the incumbent shareholder cannot be discounted.

What is common to many of these deals is a government motivation to raise funds, often driven by sovereign debt issues, or to fund new investment.  In these cases, privatisation still appears to be a preferred model.   

In the assessment of bids, once the requirement for a minimum threshold of airport management or operational experience has been satisfied, the sale price is the main deciding factor. 

 

PPP – facilitating new investment, expertise and growth

A PPP is a concession to operate all or part of an airport, placing a stronger emphasis on partnership compared to privatisation, and the PPP selection process is typically motivated by different factors.  

Usually this is due to the need for significant new investment in facilities – and often operational expertise, too – which the public sector is not able to provide.  

However, rather than sell the airport to raise funds, a government seeks to bring in private capital and expertise to achieve a specific purpose, such as construction of a new terminal or greenfield airport, and defines a very specific set of design, operational and passenger service criteria the successful concessionaire must meet.  

In India, the development of the new Navi Mumbai Airport could be one of the major deals in 2016, while we also expect concessions to be awarded for a new airport at Mopa in Goa and management contracts at four brownfield airports.  

The Brazilian government has initiated round three of its airport privatisation programme and is likely to conclude early in 2016, while concession processes are expected or ongoing in Saint Lucia, Jamaica and Ecuador.  

There is also the prospect of a second airport in Sydney being agreed, although the owner of Sydney Airport has the first right of refusal to develop and invest in the project, so a competitive process is unlikely to be launched. 

What is striking about PPPs in the airport industry is that they are used mostly in emerging economies, typically in transactions where there is high forecast traffic growth and hence a need for new or expanded facilities. 

This circles back to the main purpose of PPPs, which is to attract new investment and operational expertise to enhance and develop new infrastructure. As a result, bidding groups typically possess a combination of operational, construction, and financial expertise and experience.  

The deals can be very complex, taking months or even years to close. The winning bidder must then satisfy all the defined criteria or face financial penalties or sanctions. 

 

Secondary market – the art of the deal

Finally, one cannot discount continued activity in the secondary market. As in any industry, there is a steady stream of potential deals from many sources:  owners leaving the aviation sector (for example, Abertis and Hochtief in 2013), shareholders wishing to raise new capital, debt for equity swaps, closed-end infrastructure funds needing to sell, and owners seeking to create value by deploying capital elsewhere.

With this type of transaction, it is difficult to predict future market activity, but there is speculation on a number of potential deals in Europe, including London City – which owners GIP have put up for sale and believe to value at around €2 billion – and London Gatwick. 

The driving force for these deals is almost entirely financial. As a result, they typically attract infrastructure, sovereign wealth, and pension funds, which will invest in majority or minority stakes. 

That said, if a controlling stake is available, then shareholder value is sometimes best realised by such fund managers partnering with an airport operator. 

 

Final thoughts

The privatisation market has matured significantly in recent years and is now truly global, with different transaction types emerging. There are different motivations for each type of transaction; consequently, each type of transaction attracts a different type of investor. 

The higher risks of financing greenfield airports or owning assets in emerging economies are not for everyone. 

Some investors consider a whole investment portfolio approach across infrastructure: while they recognise that airport investments carry traffic-related risk, they may offer higher returns from multiple revenue streams and can thus be effective within a portfolio, counter-balancing lower-yield, lower-risk assets in other infrastructure classes.

The need for mutual agreement on sharing risk and reward to enable conclusion of a deal on sustainable terms is common to each type. 

Transactions can always be concluded, but as shown by some recent airport nationalisations, it is not in the public or private interest for airports to fail commercially some years later, perhaps stemming from over-ambitious bid assumptions leading to an inflated initial purchase price. 

It is a sign of the maturity of the airport transaction market that a number of different structures have emerged to cater for different investment needs.

All of the above highlight the unique nature of airports as an infrastructure asset class. 

Whatever the terms of the transaction or concession there are significant commercial and operational risks, and market players are increasingly recognising this may be best managed by partnering capital sources with technical expertise. This type of investment approach is typically adopted for other infrastructure assets.

As economies recover, governments seek to pay down debt and the usual churn of private sector investments continues the airport industry’s growing need for new investment will drive deals in 2016 and beyond.

Provided the economic outlook remains positive, increased competition for a limited supply of quality assets is likely to mean that sellers are in an increasingly strong position and valuations may continue to rise. 

That said, weaker assets or non-commercial concession structures can still lead to negotiated deals or failure of the deal. 

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