Gatwick Airport finally sold while BAA puts up a last stand to prevent the sales of other airports

12 banks, including Credit Suisse, needed to find GBP1.1 billion of finance

The first indication that a deal was imminent came on 20-Oct-2009 when it was revealed that a syndication of 12 banks, including BayernLB, Banco Espirito Santo, Calyon, Credit Suisse (a co-owner of GIP together with General Electric), HSBC, JP Morgan, Royal Bank of Canada, Royal Bank of Scotland, Santander, SMBC, Societe Generale and WestLB had cobbled together GBP1.125 billion in loan finance, although even at that late stage Ferrovial's Chairman was saying it was still in "advanced talks with more than one interested party", evoking memories of the Goldman Sachs consortium's last minute bid to upstage the Ferrovial-led Airport Development and Investment Ltd bid itself when BAA was bought in Jun-2006.

The following day, and two days into BAA's appeal against the CC's ruling, BAA announced that it had agreed to sell its 100% interest in Gatwick Airport Limited to an entity controlled by Global Infrastructure Partners for GBP1.51 billion (USD2.46 billion). Of the sale price, GBP55 million is conditional on future traffic performance and the buyer's future capital structure.

State of the market - LCY's sale price three years ago was half that of Gatwick's now - but it is less than one tenth of the size

GIP, the 50% owner of the much smaller but (pre-recession) fast-growing London City Airport (LCY) since Oct-2006 when it was purchased from Irish entrepreneur Dermot Desmond, had subsequently took complete control of LCY after co-owner and consortium leader AIG Financial Products sold up. Ownership of Gatwick gives GIP a platform on which to challenge BAA's two remaining London area airports, Heathrow and Stansted. The former will not be sold if BAA can avoid it. The latter still has to be sold, pending the outcome of BAA's appeal, but it is unlikely GIP would chase it, as it could be perceived as trying to arrange a cosy duopoly to replace the BAA monopoly that preceded it.

(An interesting statistic arises from this transaction that shows just how the market for airports has collapsed. Just three years ago, LCY was sold for GBP750 million, on the basis that AIG/GIP were convinced of its growth potential - which has been justified. Gatwick was sold for just twice that amount this week, but is ten times bigger by passenger numbers and massively bigger by freight, which is incidental at LCY).

Indeed, despite both the CC (unsurprisingly) and the European Union (EU) declaring themselves content with the sale, it is still subject to, among other things, EU merger regulation clearance. That is not always a given. Completion of the sale is scheduled for Dec-2009.

BAA CEO Colin Matthews commented, "The price we got for Gatwick was the best price in current market conditions. There's no doubt if we had sold the airport two years ago we would have got a better price." Mr Matthews declined to speculate on what sort of market he might face if forced to sell Stansted, should the appeal fail.

BAA to focus "on improving Heathrow and other airports"

In the meantime, "BAA will focus on improving Heathrow and our other airports" according to its CEO, hinting that it remains positive about winning its appeal in respect of the sale of the other airports. It may need to do just that. The future of the third runway at Heathrow remains in doubt while it is highly likely that GIP will press for the relaxation of the covenant that prevents a second runway being built at Gatwick. With LCC traffic still falling at Stansted, Gatwick, where losses have stabilised, suddenly seems like a better investment option than the Essex airport and LCY has attracted BA to try out its narrow body transatlantic service to New York; something it could replicate to other financial sectors if it proves successful.

BAA's appeal is based on the grounds that the CC did not take into account the effects of the global financial downturn when it made its judgement and that the original CC inquiry process was 'riven with the appearance of bias.' There was an element of theatre in play on the first day of the appeal hearing when the nature of the 'bias' claim was revealed. According to BAA's lawyer, a member of the original CC inquiry team, Professor Peter Moizer, had advised a consortium bidding for Gatwick, namely the Manchester Airports Group (MAG)-led consortium that included the Borealis (Canada) and Greater Manchester pension funds.

"MAG's money is under his control"

Specifically, Prof. Moizer, an academic at Leeds University's Business School specialising in accounting and finance, was reported to have advised the Greater Manchester Pension Fund. BAA's lawyer stated, "MAG's money is under his control and influence", even though he had subsequently declared his interest and stood down from the CC enquiry.

The outcome of such a revelation would probably have had far greater significance had MAG been the successful bidder for Gatwick.

Unburdening the debt is still critical to BAA. Ferrovial in a reverse merger with Cintra

The sale proceeds will be used primarily to repay part of BAA's existing debt. Although Gatwick's value had increased since the low point of GBP1.1 billion that was on offer earlier this year, it was still shy (a discount of 14%) of Gatwick's Regulated Asset Base calculation (RAB) of GBP1.57 billion and this realistically has to be viewed as fire sale. Ferrovial stated it expects to book a GBP129 million (USD212.5 million/EUR142 million) loss against its consolidated earnings from the sale and shares in Ferrovial fell 2.3% in the immediate wake of the announcement.

In the original Jun-2006 sale Ferrovial paid GBP10.1 billion (USD16.6 billion) for BAA's seven UK airports as well as its international operations, many of which have since been sold off, including the 75% holding in Budapest Airport, part ownership of airports in Australia and World Duty Free. As if to emphasise the seriousness of the situation BAA's property company, APP Lynton, was put up for sale on the same day the Gatwick sale was completed.

That move is no great surprise when one considers that the highly leveraged BAA reported net debt of GBP9.7 billion in Jun-09 and GBP9.8 billion in Sep-2009, up from GBP9.4 billion at the end of 2008, and faces a GBP1 billion debt maturity in Mar-2010. It could make the payment without having sold Gatwick, but more funds are needed to repay a second GBP1 billion debt maturity due in Mar-2011. Late in Oct-2009, BAA announce that at least the GBP1.2 billion pounds in cash raised from the sale of Gatwick will now enable it to cover all significant financing commitments until 2011.

Nine months EBITDA (to end Sep-2009) rose 16.8% to GBP804.6 million. Operating costs fell 3.3% and one-off pretax charges totaled GBP537 billion.

BAA financial and traffic highlights: nine months ending 30-Sep-2009
(GBP millions)

Measure	Amount/Change	Change
Revenue	1,846	+7.6%
(Aeronautical)	1,1013	+13.2%
(Heathrow)	723.7	+20.0%
Gatwick	189.9	+6.6%
(Stansted)	99.7	-12.2%
(Retail)	457.4	+1.7%
(Other)	375.3	+1.0%
Adjusted operating costs*	1,041	+1.4%
EBITDA	544.1	-15.7%
Pre-tax profit (loss)	(784.7)	Cf. (519.5) in pcp
Post-tax profit (loss)	(636.3)	Cf. (372.3) in pcp
Passenger numbers	90.7	-5.5%
(Heathrow)	49.9	-2.3%
(Gatwick)	25.4	-7.2%
(Stansted)	15.5	-12.0%
Net retail profit per pax	GBP4.46	+6.1%

Source: Centre for Asia Pacific Aviation & BAA
*Before depreciation (GBP387.1 million) and exceptional items (GBP312.1 million)

Emboldened by these slightly better than anticipated passenger figures and by additional revenues from higher landing charges and strong retail performance, BAA declared that the worst of the slump was over and that hoped to re-enter the bond market soon following the sale of Gatwick Airport. Prior to the global financial downturn, Ferrovial had planned to sell approximately GBP4.5 billion in bonds to refinance its purchase of BAA.

On the face of it, Ferrovial, is not in much of a position to help BAA out from its own resources. With the construction industry in its home country of Spain in disarray, and its debts still estimated at EUR30 billion, it is lined up for a merger with Cintra which is in fact a reverse merger, in which Cintra increases capital to absorb Ferrovial. The resulting company will be called Ferrovial SA. The merger is expected to be finalised by the end of 2009.

Gatwick passenger experience 'to be transformed'

How will the change of ownership at Gatwick affect passengers? Speaking on behalf of GIP, partner Michael McGhee stated, "we will upgrade and modernise Gatwick Airport to transform the experience for both business and leisure passengers. We plan to work closely with the airlines to improve performance, as we have done successfully at London City Airport." He also indicated that 'head-to-head' competition with Heathrow would be limited but that a 'more focused approach' on Gatwick would help to attract passengers, without going into detail about the nature of the focus.

It is certainly the case that LCY is a comparatively pleasant experience for most passengers but it only handled 3.26 million passengers in 2008, less than one tenth of the total at Gatwick, which is a different proposition entirely. The timescale for improvements to make it a 'customer driven airport' in the first instance looks to be from two to five years.

Many comments were reported by airlines. Ryanair, which made a presentation to the Competition Commission Appeal Tribunal, stated that it regards the sale as the "first step in the break-up of the BAA airport monopoly, and restoring competition and customer service to the airport sector in London". Unsurprisingly it also called again for the speedy sale of Stansted Airport and launched into a typical tirade against its bête noire, the Irish Government's Dublin Airport Authority (DAA) monopoly, urging the government to sell Cork and Shannon airports and to construct a competing low cost terminal at Dublin Airport.

Airline concerns about a mini Gatwick monopoly

Flybe, which accused BAA of charging some of the highest prices in the business, and Virgin Atlantic, which bemoaned lack of investment and urged GIP not to become "another BAA", both welcomed the sale, as did easyJet, while it remained cautious of the current "ineffective regulatory system for airports".

easyJet's CEO, Andrew Harrison, stated, "regardless of who owns Gatwick, it is still a monopoly. Therefore it is vital that Gatwick is properly regulated to protect airline passengers from the new owners exploiting their market power. It is vital that the Government's review of airport regulation produces a tougher and more effective system than the current discredited one which has contributed so much to the poor state of London's airports.

It is interesting that Mr Harrison considers that a large monopoly has been replaced by a smaller one. The break-up of terminals, at either Heathrow or Gatwick, was never seriously considered as part of this exercise.

The future for other BAA airports becomes clearer

The future for BAA's other airports, assuming that its appeal fails, is starting to look a little clearer. In the knowledge that it could not bid for Stansted as well, GIP has hinted that it might be interested in one of the Scottish airports. The same might be true of MAG, although that organisation's image may now be a little tarnished - if a little unfairly - by the 'Moizer affair'. MAG had shown interest in both Glasgow and Edinburgh airports before it went after Gatwick and long before GIP began casting predatory glances northwards and over the border.

Moreover, one of MAG's consortium members, Borealis, is no newcomer to airport privatisation and if its alliance has gone smoothly it would no doubt wish to keep it going. The Greater Manchester Pension Fund though, is, and it was only brought in late in the day to help reduce the debt finance aspect of the MAG bid. It is not clear that it will participate further but with a little evidence that the market is starting to turn positively, it may also choose to persevere.

For both parties, Edinburgh, a smaller airport than any of the three BAA London airports, but one that has increased its value significantly (one measure is that its traffic has increased by an average of 3.52% in each of the last six months, Apr to Sep-09 especially on the back of strong Ryanair growth, while Glasgow's has decreased by an average of 11.53% in the same period) would be the preferred option. But BAA has the final say on which of them should be sold. In the meantime they have to be sold 'in order' and Stansted is next. That is expected to be sold by the end of 2010.

European governments watch with interest - US state governments, too?

Finally, the deal will be closely watched by governments looking to sell airports across Europe, including those in Lisbon, Madrid and Prague, after the financial crisis forced many to shelve privatisations as asset values fell. The sale could be the boost that these languishing deals needed.

It might, just might, also be the signal needed to kick start some lease deals in the US, where the industry is still in a state of denial after the collapse of the Chicago Midway lease deal earlier this year, one that saw the (temporary?) exit of the Citi Infrastructure consortium that was also the third bidder for Gatwick.

At the recent ACI North America annual conference, many airport executives agreed that financial pressures in the country are likely to expedite moves to privatise the management of publicly owned facilities. Some said they saw little choice for the industry as a whole but to look at innovative measures such as the privatisation methods that are widespread in Asia and Europe. One of them just paid off, for GIP, but it was a long haul to get there and now the real business starts - to turn Gatwick into a profitable, customer friendly and appreciated facility.