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City council set to sell Auckland Airport stake? Part one – could potentially raise NZD2 billion

Analysis

There has been little M&A activity in Southeast Asia and Oceania during the COVID-19 pandemic, apart from the unexpected sale of Sydney Airport, which concluded at the beginning of 2022.

Now, equally unexpectedly, comes confirmation that Auckland City Council, a long-time holder of equity in the city's airport (which is the country's global gateway), may sell that stake.

It is unlikely that any other public sector organisation would want to acquire that stake, even though neighbouring Manukau Council is also a shareholder.

And that means that the private sector may again be offered the opportunity to gain a toehold in the airport, although there is no certainty that the general population would acquiesce - even if they would be the beneficiaries of the sale by way of reduced rates.

This is part one of a two-part report.

Summary
  • Auckland City Council is considering selling its 18% stake in Auckland International Airport, which could raise nearly NZD2 billion.
  • The mayor does not consider the airport to be a strategic asset and believes the sale would reduce the debt servicing cost to taxpayers.
  • The sale would not give the council a seat on the board, but it is currently the largest shareholder in the airport.
  • The potential sale price could vary considerably, but the earnings multiple is expected to be lower than pre-pandemic levels and lower than the recent sale of Sydney Airport.
  • Dubai Aerospace Enterprise's audacious attempt to buy a majority stake in Auckland Airport in 2007 at a high earnings multiple is unlikely to be repeated.
  • Auckland International Airport has been selling off other assets in recent years and the proposed sale is likely to be controversial among ratepayers.

Summary

  • Auckland City Council could sell its 18% share in Auckland Airport.
  • The mayor no longer considers the airport to be a strategic asset.
  • Large numbers are being floated, but its comparative value could be less than Sydney's.
  • There is no certainty it would have the support of the local population.
  • The airport has been selling off other assets; now only one other airport on the books.

Auckland could raise NZD2 billion from the sale of its stake in the airport

Auckland's Mayor Wayne Brown said at the beginning of Dec-2022 that the sale of the council's stake in Auckland International Airport could raise almost NZD2 billion (USD1.27 billion).

It is not the first time Mr Brown has spoken of a potential sale recently, and last month a mayoral spokesman said that selling airport shares was an option to address the council's financial shortfall.

As in many other countries, the economic impact of COVID-19 and rising inflation and interest rates are likely causes impacting the city's revenue base, including the airport.

Not regarded as a strategic asset, and doesn't offer a seat on the board

The mayor does not regard an 18% share in a company that isn't paying dividends to be a strategic asset, but others, including some councillors, may still want to make the case that it is.

The sale would result in an annual reduction of the debt servicing cost to taxpayers of at least NZD88 million (USD56.09 million), decreasing the 2023 general rates rise in the city by almost one third and plugging an NZD270 million hole in his first budget. The council's airport stake is its largest financial holding, with the sale forming part of Mr Brown's budget proposal for 2023/2024.

However, the shareholding is too small to give the council a seat on the board, thus directly influencing its strategic direction.

But it is the largest shareholder

Moreover, while Auckland International Airport Ltd (AIAL) was floated on the (Australian) Stock Exchange in Feb-1999, making it one of the first gateway airports globally to be listed publicly, the city is its largest shareholder - although having built up its holding it has reduced it a little latterly to the current 18%.

Another local council, Manukau, is a minority shareholder.

Manukau ward councillor Alf Filipaina has been quoted as saying previously that he was opposed to selling the council's stake in the airport, adding, "We've kept the shares because of the benefits the airport brings to Manukau and Auckland".

The growing expectation in Auckland is that a sale could raise up to NZD2 billion.

Based on the recent share price, Auckland Council's 18% stake is valued at NZD2.166 billion, a figure which could vary considerably according to bid speculation, or the lack of it.

AIAL: share price, six months to 02-Dec-2022

In Financial Year 2021 revenues were NZD281 million (-50% compared to FY2020) and EBITDAFI (earnings before interest, taxation, depreciation, fair value adjustments and investments in associates - EBITDAFI, is a statistic used mainly in New Zealand) was NZD171.5 million, giving an EBITDAFI margin of 61% - a figure many other airports in the world would happily aspire to.

In FY2020 the result was: revenues NZD567 million; EBITDAFI NZD260.4 million; margin 46%.

The earnings multiple might be less than in the case of Sydney

Either set of statistics could be used in calculating what the earnings multiple would be.

In the FY2021 instance, if the sale price matched the market valuation it would be 12.6 times the EBITDAFI (broadly requiring 12 years of profits to pay back the investment), and in the case of 2020 - 8.3 times.

Both of those figures are lower than the average in the years immediately before the pandemic (approximately 18 times annual earnings), and stand in contrast to the deal which secured Sydney's Kingsford Smith airport earlier this year. That represented a multiple of 44 times its earnings in the year ending 30-Dec-2020, and 35 times earnings in the year ending 30-Dec-2019.

Reminiscences of 2007, when it was vastly overvalued

The sale talk has dug up the audacious attempt by the fledgling Dubai Aerospace Enterprise (DAE) in 2007 to buy up to 60% of Auckland Airport at an earnings multiple in the stratosphere - of over 60 times, which was unheard of at the time.

The only certainty is that DAE would not be returning to revisit its bid. Although it still exists, it opted out of airport investment long ago.

AIAL has been selling off other assets

AIAL has been more concerned in recent years with selling off other, external assets.

In Mar-2018 it completed the sale of its 24.5% holding in Cairns Airport and Mackay Airports in Australia via North Queensland Airports (NQA) for a total of AUD370 million. The CEO at the time said that the revenue from the sale would be "recycled" into supporting "the significant investment in aeronautical infrastructure at Auckland Airport over the next five years", and that "the sale of our shareholding ensures that we can focus on growing our New Zealand travel, trade and tourism businesses".

But of course, that was before the COVID-19 pandemic and the establishment of New Zealand as one of the most 'locked down' and travel restricted countries in the world.

Before then, in 2015, Auckland Council's finance committee had passed a resolution to review the city's financing structure, including strategic assets such as the Port of Auckland and Auckland Airport.

The evaluation, undertaken by independent consultants, considered a partial or full divestment of holdings in the airport, as well as leasing arrangements and outsourcing mechanisms. So this is not an entirely new situation by any means.

The proposed sale now is likely to be controversial. Ratepayers are likely to be happy if 2023's rates are cut by nearly a third and they are no longer expected to stump up extra cash.

Cutting the ratepayers' burden has never been a tool to promote privatisation that was employed in, for example, the US, where airports and their infrastructure are financed differently, and where using revenues from a lease would more likely be to shore up pension funds, repair the sewers or improve waste disposal services. (All of those have been proposed in the past, in cities like Chicago, St Louis and Los Angeles).

In part two of this report, CAPA will consider that the local population may be wary of a sale to the private sector; potential interest from Infratil; that Auckland airport acts as the nation's tourism gateway; and how capacity is returning only slowly.

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