Auckland Airport hedges its bets, as Canadian bid partially endorsed


Auckland Airport has made a spectacular back-flip - today recommending that shareholders should sell their shares into the takeover offer from the Canada Pension Plan Investment Board (CPPIB) for NZD3.6555 per share (less the 5.75 cents per share interim dividend to be paid next month ).

  • Board of Auckland Airport now recommends CPPIB bid;
  • But Board not in favour of CPPIB acquiring 40% of the company;
  • Board quite downbeat, after unveiling another strong interim profit;
  • EBITDA margin of 78.6%, net margin reaches 30.2%;
  • CPPIB gains boost in favourable responses to bid;
  • Offer closes on 13-Mar-08;
  • Non-aero revenues surging, while domestic traffic rising rapidly on new entry;
  • AIAL sees increase in funding costs due to “current global credit tightening”.

Dubai Aerospace's bid for AIAL failed last year on reports of a lack of support by the Board to promote the offer in New Zealand, while CPPIB's bid was initially rejected on the grounds that it did not fully reflect the long-term value of Auckland Airport.

This is still the view of a majority of AIAL Directors. According to the latest AIAL statement, a majority of the Board recommended shareholders should vote against CPPIB acquiring up to 40% of the company (ie giving effective control), as they believe the shares in the company are "likely to be worth more longer term without CPPIB involvement".

AIAL Chairman, Tony Frankham, stated all directors agreed that market conditions have "changed significantly" since the CPPIB bid was announced and that shareholders would be "unwise" not to realise part of their holding at the favourable partial offer price, if the partial offer receives approval to proceed.

The statement concludes, "on balance, [the majority of Directors] feel that the certainty of selling 40% of the company for significantly more than its current trading price outweighs the disadvantages of bringing on board a significant minority shareholder without material aeronautical or tourism connections]".

This is hardly a ringing endorsement and could create even more shareholder unease.

AIAL's back-flip follows a huge boost in favourable responses to the previously hostile CBBPB offer by shareholders lately. (CPPIB needs a majority of shareholders to approve its bid to acquire 40% of AIAL, with an acceptances target of 39.2% required to complete the offer)

CPPIB bid progress: Acceptances and Votes in Favour: 04-Feb-08 to 20-Feb-08

Source: Centre for Asia Pacific Aviation

Meanwhile, for a company generating an EBITDA margin of 78.6% in its latest earnings period, while entering one of the strongest traffic environments this decade, the Board of Auckland Airport was surprisingly downbeat in its latest results commentary. At the time of the release of the earnings report, for the first half (ended 31-Dec-07), AIAL did not recommend shareholders accept the CIPPB bid.

For the six months ended 31-Dec-07, AIAL's revenue rose a solid 7.9% and net profit 5.1%. This produced a net profit margin of 30.2% - a level that would be the envy of most in the aviation industry, and described by Mr Frankham as "another good result". Non-aeronautical revenues are surging, thanks to several recent initiatives and investments. Retail income in the six-month period rose 10.4%, car parking income surged 15.5% and rental income rose 15.7%.

But looking forward, Chairman, Tony Frankham, had stated "the impact of the global macro-economic environment, combined with a slowing in the domestic economy, reduce the expected level of passenger growth for the remainder of this year".

Mr Frankham recognises there is strong growth ahead in domestic passenger numbers, thanks to Pacific Blue's domestic entry and aggressive responses by Air New Zealand and Qantas. But there are "signs of a levelling off in international passenger growth", according to Mr Frankham, with a higher New Zealand currency and higher oil prices being "important factors".

However, in its latest traffic update, Air New Zealand reports Dec-07 passenger numbers rose 6.0% year-on-year, with growth achieved across both short-haul and long-haul routes, with 4.7% and 12.8% increases, respectively. Qantas meanwhile reports no downturn in traffic in the New Zealand market, despite global economic uncertainties.

The AIAL Board also stated "the current global credit tightening is also expected to further increase the company's funding costs over time" - another reference to the concerns AIAL has over proposed increases in debt levels under the CPPIB bid.

Despite AIAL's conservatism in the face of rising traffic and profits, and back-flips on recommendations as Directors argue about what might be good for shareholders, the airport's shareholders are increasingly getting behind the Canadian bid.

And clearly, the AIAL Board is in a difficult position it it recommends that shareholders do not sell - when the Board itself says that "a more favourable offer in all aspects is unlikely to be available to shareholders in the near term".

But overall acceptance levels need to rise sharply in the next three weeks if CPPIB bid is to achieve the ownership threshold it seeks.

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