Big guns are lined up for this year’s three big airport transactions
After spending two years distinctly in the doldrums since the fire sale bargain disposal of Gatwick Airport, airport privatisation activities are beginning to make the news headlines again. Currently there are three major transactions – the sale by Hochtief of its concessions division, which includes airports; the concession on Puerto Rico’s Luis Munoz Marin airport, and, the biggest of them all, the concessions to operate Spain’s two main airports at Madrid and Barcelona. This article looks at who is bidding for what and, as far as can be ascertained, why. It considers the possibility that at least one of the processes could still fall at the last hurdle.
According to Germany’s Hochtief, there are three bidders remaining for the sale of its airports interests, with the sale price expected to be more than EUR1.3 billion (USD1.8 billion) and all three bidders reported to be offering broadly the same amount. Those airport assets include Hochtief’s stakes in airports in Athens, Budapest, Dusseldorf, Hamburg, Sydney and Tirana. The book value of the assets is in the region of EUR1.6 billion (USD2.26 billion). Hochtief originally said it would not sell below EUR1 billion and the bids were rumoured to be less than that amount.
Hochtief is selling off the Concessions business, which comprises airports as well as the construction of roads, schools and hospitals, after becoming embroiled in a losing takeover battle with Spanish predator and minority shareholder Actividades de Construccion y Servicios SA (ACS) and has previously indicated it wanted to divest Concessions gradually starting with the airports business, as it focuses on the services and maintenance sector. Hochtief shelved early plans for an initial public offering for the Concessions unit though an IPO remains an option until a sale is completed.
Hochtief’s concession business has smallest revenues but biggest profits
Concessions generated only a fraction of Hochtief's most recent quarterly revenues, but all of its pre-tax profit of EUR10.2 million (USD14.4 million). That might indicate the potential for a greater degree of interest, but the portfolio mainly consists of minority stakes, and infrastructure investors usually look for broader control of assets. Some insist on majority or even complete control. The holdings for sale comprise a 20% stake in Dusseldorf airport, 34.8% in Hamburg, 47% in Albania's Tirana airport, 5.6% in Sydney (where MAp Airports has almost complete control since its recent share swap transaction with Canada’s OTPP), 26.7% in Athens (where the government is still trying to sell its stake and has started to ramp up its efforts in view of the dire state of the Greek economy) and 49.6% in Budapest, where the government recently sold its stake. It is a dauntingly complex scenario.
The bidders include French construction and services conglomerate Vinci, which has reinvigorated its interest in the airports sector since it began taking on selected French regional airport management contracts (10 in all and including the BOT project at Nantes), with an eye to forthcoming privatisations of larger French regional airports.
The second surviving bidder is Germany’s Fraport, in a consortium that includes Deutsche Bank’s infrastructure investment fund RREEF. CEO Stefan Schulte has stated that Fraport is only interested in the ‘international’ (to Fraport) portfolio of the unit, that is, stakes outside of Germany, which removes Dusseldorf and Hamburg from the equation, to be operated by RREEF (which is not typically an actual operator), in order to avoid competition issues. Fraport is involved in other transactions momentarily as detailed below, and is increasingly looking for new opportunities in Brazil, the US and elsewhere. Just now it could reasonably be described as the most active airport investor/manager in the world.
The third bidder is China’s HNA Group, the parent of China's fourth-largest airline Hainan Airlines. HNA Group is a large Chinese multi-industry enterprise group. Its business scope covers Air Transportation, Airport Management, Hotel, Logistics, Real Estate, Retail, Tourism and other related industries. It owns 68% of Haikou-Meilan International Airport Company which it manages and 12 other airports. HNA is becoming increasingly involved with international airport operation and has already agreed a strategic co-operation deal with Incheon Airport Group, South Korea and a cooperation agreement with Beijing Municipality’s Tongzhou District to construct the Beijing International Aviation City project, 4.5km from Beijing Capital International Airport, with an investment of CNY30 billion (USD4.4 billion). It is also investing CNY70 billion (USD10.8 billion) in aviation, logistics, finance, tourism and airport management in Wuhan, China. It is noted for its highly complex ownership and risk-sharing structures.
It failed in a bid to take a minority stake in Belgium’s Charleroi Airport two years ago (losing out to Italy’s S.A.V.E) but latterly has expressed an interest in acquiring a 10% stake in BAA Airports Ltd, thereby delighting Ferrovial, which can’t lose it quick enough. Like most Chinese companies it is clearly unafraid of operating at a distance. At the time of the Charleroi bid it examined the European aviation infrastructure scene in some detail and its bid for the Hochtief assets was launched in tandem with an enquiry for Malev Hungarian Airlines. (This means, of course, that if it were to be successful in both bids it would end with a controlling share in the national airline and an almost-controlling share in the main gateway airport).
Two other bidders appear now to have withdrawn, namely Singapore’s Changi Airport Group and Global Infrastructure Partners (GIP), the operator of London’s Gatwick and City airports, in co-operation with the insurer Allianz.
The sale talks will now continue, with the field of bidders to be further reduced in the coming weeks. The current turmoil on stock markets means the process is unlikely to be a quick one.
Global representation at Puerto Rico RfQ stage
The up to 50-year concession to operate Puerto Rico’s Luis Munoz Marin International Airport – one that has supplanted Chicago Midway as the benchmark for progress (or lack of it) in US airport privatisation – has unsurprisingly attracted widespread interest with no less than 12 companies initially involved, including pension funds that are new entrants to the sector and even the operator of Pittsburgh Airport.
The process has reached the Request for Qualifications (RfQ) stage, and the level of interest has proved highly encouraging according to the government.
The list of bidders at the RfQ stage was:
- Fraport in association with Goldman Sachs Infrastructure Partners (US/UK);
- GMR (India) and Incheon International Airport Corp (Korea);
- The Puerto Rico Gateway Group including GE Capital Aviation; Allegheny County Airport Authority, TIAA-CREF, OpTrust and retail concessions developer Airmall;
- Advent International (US);
- OMA (Mexico);
- ASUR (Mexico) with Highstar Capital (US);
- Corporacion America (Argentina);
- Agunsa; (Agencias Universales); a consortium involving Zürich Airport (Switzerland), PSP Investments, Camargo Correa and Gestion e Ingenieria IDC;
- TAV Airports Holding (Turkey);
- AENA International (Spain);
- Grupo Aeropuertos Avance (Macquarie [Australia] with Ferrovial [Spain]);
As is often the case with a major airport transaction where none have gone before, this deal has attracted entirely new entrants such as the US insurance and financial services company TIAA-CREF; OP Trust, another large Canadian pension fund; and the retail concessions developer Airmall, which probably believes it can bring a higher standard of retail operation to the party as some similar (local) organisations did in the Delhi and Mumbai airport concessions five years ago.
Goldman Sachs Infrastructure Partners returns to the fold having previously been involved in bids for BAA, Chicago Midway, and SEA Milan. Concurrently, it has lodged an EoI for the operation of Los Angeles’ area Ontario Airport, currently operated by Los Angeles World Airports.
Interestingly, GMR has linked up with the newly-aggressive Incheon International Airport Corporation for this deal, having decided it to go it alone in then Spanish concessions race (see below).
Mid-sized US airport operator commits to a private concession deal
GE Capital Aviation is no stranger to airport investment and operation, having set up the GIP fund with Credit Suisse and AIG but in this instance it has partnered with the insurance and pension funds mentioned above, Airmall and, unusually, the Allegheny County Airport Authority, which now has responsibility for Pennsylvania’s Pittsburgh Airport. It is highly unusual for a mid-sized US airport operator to commit to a private concession deal, anywhere, and presumably it is on board for its experience of managing an airport through a tough economic climate – Pittsburgh’s air traffic virtually halved after US Airways took an axe to its service roster a few years ago.
Advent International is a US private equity firm best known for its ownership and management of the Aeropuertos Dominicanos Siglo XXI (Aerodom), the leading airport group in the Dominican Republic, and for being one of the largest airport operators in Central America and the Caribbean.
Mexico’s OMA (Grupo Aeroportuarios del Centro Norte) has chosen to go it alone while compatriot ASUR (Aeroportuarias del Sureste) has linked with Highstar, the US infrastructure investment fund manager which still holds a 25% stake in London City Airport that it has been trying to dispose of.
Corporación America is an operator of key airports in Argentina, Uruguay, Ecuador and Armenia, many of them under the Aeropuertos Argentina 2000 (89% subsidiary) name. It is also active presently in Brazil where privatisation of the airports is slowly and belatedly gaining momentum.
The Agunsa consortium – Agencias Universales - is effectively the A-Port consortium that was formed in 2008 by what was then Unique Zurich (now Zurich Airport) and with the same members. A-Port S.A. has currently assets in Chile, Brazil, Columbia, Honduras and the Netherland Antilles.
TAV Airports, which is not entering the Americas for the first time (it was part of a consortium bid for Chicago Midway), and which, like Fraport, has global ambitions presently, has chosen to go it alone, ignoring the lure of the Hochtief airports and, more surprisingly, the Spanish concessions.
On the subject of those Spanish concessions, not only has Ferrovial (rekindling an old alliance with Macquarie), popped up, and which is a bidder for the Madrid and Barcelona concessions, but also AENA itself, through its autonomous Internacional division, which has been active in the Caribbean and Latin America since the mid 1990s. Macquarie has recently won two tenders to operate toll roads in Puerto Rico, which must count in its favour.
The winning bidder is expected to provide up to USD1 billion in capital up-front plus a big investment over the lifetime of the concession to double the existing passenger capacity. The airport handled 8.57 million passengers in 2010, a +3.9% rise over 2009, but well down on the record year of 2005, when it handled 10.77 million passengers.
“Conflict of interest” delays procedure
A short-list was expected to have been drawn up by 31-Aug-2011, with the chosen companies then making full bids for a contract likely to run for 40-50 years (see Stop Press, below). However, the procedure seems to have stalled at the time of writing (07-Sep-2011) and that may be because of a “conflict of interest,” with one of the qualified bidders (Macquarie Capital) being the same entity that counselled the (US) Commonwealth government in structuring its public- private partnership. Apart from being an investor, Macquarie Capital also provides advisory and capital-raising services to corporate and government clients involved in public mergers and acquisitions and currently has consulting contracts in excess of USD1.2 million with the government to develop guidelines and procedures for the Puerto Rico Public Private Partnership Authority. Ferrovial already conducts business in Puerto Rico.
This situation is not unusual. Goldman Sachs, for example, also offers advisory services as well as being a source of investment through its funds. Moreover, Macquarie is not included in a list in the RfQ of (half a dozen) companies that cannot compete to become the privatising agent, or be associated with a bidding proponent, presumably because they have taken part in designing the privatisation process.
But it has provided ammunition for those not willing to embrace the concept of privatisation, and there are many of those in and around just about every US airport. In Puerto Rico’s case one politician has already pointed to the threat of giving control of all air cargo movement to a private entity, as well as the more pragmatic reason that other ports now subsidised by the earnings from the LMM Airport will be left without financial support for their operations, particularly the small regional airports. The LMM Airport is reported to yield between USD60 and USD100 million a year in revenues that are currently used to subsidise the operations of other ports (air and sea) throughout the island.
The wider import is that, according to local media quoting a government source, “this situation will have a terrible effect on Puerto Rico’s business climate. Prospective investors will think twice before coming to Puerto Rico if this form of corruption is to prevail.”
Opposition to the privatisation of the airport “as a matter of principle” seems to be growing on the grounds that it is considered in some quarters to be “detrimental and dangerous to Puerto Rico."
The wilderness of limbo
There is a danger, albeit a slight one, that this groundbreaking deal could end up going into the wilderness of limbo as Chicago Midway did.
Could that also happen in Spain? It is highly unlikely but the proposal to firstly invite the operation of Spain’s two main airports, Madrid Barajas and Barcelona El Prat by concession, followed by others and ultimately by the sale of a large slug of the AENA entity, has been strongly resisted in some quarters. Again at the time of writing it appears that official invitations to tender will be sent out very soon, but the fact that Prime Minister Zapatero has called a general election for 20-Nov-2011 hangs hauntingly in the background. Zapatero’s austerity measures to date to combat Spain’s severe economic crisis and dreadful unemployment statistics have not been successful and the EU administrators and IMF are constantly on the verge of stepping in.
There are currently seven groups of interested bidders, five of them for both airports and one each for either Madrid or Barcelona. The interesting thing is that there is little overlap with the other two transactions, Hochtief and Puerto Rico; the days when airport operators and their associated investors charged in like a bull in a china shop for anything on the table is long gone and most are now very choosy indeed.
The list of known bidders/consortia is as follows:
- Madrid Barajas (Bidding for a 90.05% stake):
- Ferrovial SA with Canada Pension Plan (CPP) Investment Board European Holdings, MFI Investments Luxembourg and Infinity Investments SA;
- GMR Infrastructure
- Changi Airports International, FCC Construction and Siemens Project Ventures
- Aeroports de Paris, GIP Ilex and AZ-Gip Argos
- Fraport AG Frankfurt Airport Services Worldwide, Global Oresme SLU, Global SLU Lubbock and Buridan SLU
- Grupo San Jose, SA Cedicor and Global Mirobriga
- Barcelona El Prat (Bidding for a 90.05% stake):
- Ferrovial Aeropuertos, CPP Investment Board European Holdings, MFI Luxembourg and Infinity Investments SA;
- GMR Infrastructure Limited;
- Changi Airports International, FCC Construction and Siemens Project Ventures;
- Aeroports de Paris, GIP Ilex and Az-Gip Argos;
- Fraport AG Frankfurt Airport Services Worldwide, Global Oresme SLU, Global SLU Lubbock Global and Buridan SLU;
- SA Abertis Airports, Borealis and Ibervías.
Abertis is playing its cards close to its chest in its home city of Barcelona, linking up with Borealis (OMERS), the Canadian pension fund whose last foray was in 2009, an unsuccessful joint bid with Manchester Airports Group and Greater Manchester Pension Fund for London Gatwick Airport. Borealis has a strategic alliance with the US/Canadian HAS&ADC which, strangely, is not involved in any of these three transactions considering its ambitions on the global stage. Borealis has no airport management experience except for a small stake in Porter Aviation Holdings, which operates Toronto’s Billy Bishop airport.
Ferrovial has also hooked up with a Canadian fund – the Canada Pension Plan - and Luxembourg’s MFI Investments. GMR Infrastructure will lodge a bid in its own name. Changi Airports International, which has a 4.2% stake in Aeroporti di Roma, joins with the Spanish construction giant FCC and Siemens Project Ventures, which has been reducing its exposure to India by selling off part of its stake in Bangalore Airport.
New investors largely unknown
Very little is known about many of the other organisations, which are new to the airport sector and mostly Spanish. Grupo San Jose is regarded as a low key construction company by local observers. An internet search failed to dig up any substantial information on the likes of Infinity Investments SA, SA Cedicor, Global Mirobriga, Global Oresme SLU, Global SLU Lubbock, Buridan SLU and Ibervias. All are likely to be small scale players.
Global Infrastructure Partners were asked to comment if ‘GIP Ilex’ and Az-Gip Argos were connected to it but have not yet replied. It seems unlikely that GIP would co-operate with Aeroports de Paris. It is known that Fraport’s preferred partner is the Spanish construction giant Acciona, so it is quite possible that Global Oresme SLU, Global SLU Lubbock, and Buridan SLU are connected to that entity. Further clarity is sought. A late entrant that is not even mentioned in the bid postings is the aforementioned ACS, which is believed to have approached consultants to advise on a bid it proposes to submit in conjunction with a large UK operator (of which there are few and only one that handles more than 25 million passengers a year, see the criterion mentioned below).
In fact the entire procedure is taking on a similar feel to the rather disorganised Delhi and Mumbai concessions though the participants cannot be blamed when it is still not certain the procedure will go ahead, or that it will not be cancelled.
AENA Aeropuertos, the company set up to handle the privatisation procedure, will analyse the documentation put forward from these companies and, if it all meets their criteria, will announce in week commencing 12-Sep-2011 just who will be moving forward into the second round of the tender process. The next round will include the consortiums making a financial offer for the operating contract.
The seven groups have submitted documentation certifying experience in managing airports handling more than 25 million passengers p/a in 2010, and more than EUR3 billion in assets. Those cleared by the government will have access to data rooms with information on the two airports. Both airports will be operated by private companies over a 20-year period, with an option for a five-year licence extension.
Floor price may not be realised
The Spanish government set a floor price of EUR3.7 billion for Barajas and EUR1.6 billion for El Prat when it finally put the airports up for sale in Jul-2011 after close to two years of vacillation, in order to cut its borrowing needs. It hopes to complete the sale in Nov-2011. However, Ferrovial Airports’ Corporate Development Director John Bruen stated it is "unlikely" the Spanish Government's expectation of receiving those amounts will be met, based upon the contract structure currently proposed.
In summary, it can be seen that there is one key player common to all the deals, i.e. Fraport, which has a presence in all three transactions. Following close behind are Ferrovial, which may well exit BAA altogether when the next round of divestment is complete, and GMR. Changi Airport would have been in for two had it not withdrawn from the Hochtief tender. Will these big guns lead the way in the next round of privatisations, whenever that may be? It is odds-on they will.
Stop press 1. Vinci SA and HNA Group are reportedly the two remaining bidders for Hochtief's airport portfolio; a process that should be completed in Oct-2011. Fraport/deutsche Bank RREEF has reportedly pulled out. The bids of HNA and Vinci both reportedly value Hochtief's airports above EUR1.3 billion. Two companies have reportedly finished due diligence and are currently holding talks with the co-owners of Hochtief's airport assets.
Stop press 2. Spain's opposition People’s Party, which polls indicate will win the national election on 20-Nov-2011, criticised the government’s tender to sell management contracts for Madrid Barajas and Barcelona El Prat airports, describing the timetable as “feverish”. “It’s not acceptable to rush through the biggest asset sale as they are doing with the privatisation of AENA. It is being done at the worst moment,” Andres Ayala, the People Party’s infrastructure spokesman said. The People's Party will reportedly call for the awarding of contracts to manage the airports to be postponed until after the election. There are also reports of poor and insufficient levels of corporate information being available at the data room that has been set up by AENA Aeropuertos to assist bidders and that some bidders consider the price to be too high. However, AENA denied it would change any of the terms or lower the price despite firm indications from Fraport that it might not proceed with its bid for “unattractive assets” (27-Sep) and hints from others that they might follow the same course.
Stop Press 3. Puerto Rico’s Public Private Partnership Authority selected six consortia to bid (stage 2) for a no more than 50-year concession to operate San Juan International Airport. Officials now hope the deal will be worth USD1 billion, with a successful bidder chosen in early 2012. The finalists are:
- Puerto Rico Gateway Group;
- Grupo Aeropuertos Avance;
- ASUR andHighstar Capital;
- GMR and Incheon Airport;
- Fraport and Goldman Sachs;
- Zurich Airport, Camargo CorreaandPSP Investments.
For more information on global airport ownership, see CAPA's Global Airport Investors Database, published in Jul-2010.