UK’s Edinburgh Airport sale rumours emerge again – who might buy it and what would it be worth?
In a period when merger and acquisition activity in the airport sector still lags well behind what it was before the COVID-19 pandemic, the suggestion that Edinburgh Airport could be sold will inevitably invoke much chatter on the Twittersphere.
Such a sale has been mooted on several occasions in recent years, but now may not be the best time to do it, with the war in Ukraine showing no signs of ending and a highly uncertain economic situation.
But then, if an investor sees opportunities in other markets and perceives only a continuing deterioration in the UK, then it could be argued that there is no time like the present.
Summary
- Another 'Edinburgh Airport for sale' report is in circulation - this time it might have legs.
- Global Infrastructure Partners has been switching its focus away from the UK.
- Edinburgh Airport has been a solid performer and is attracting more trans Atlantic flights.
- Passenger recovery at Edinburgh outstrips some of its peers, but capacity still lags the pre-pandemic position.
- Some of the 2012 bidders could return if there is a sale, but the dynamic has shifted since then.
- Difficult to estimate a value based on recent years' financial performance, but GBP2 billion is about right.
Edinburgh Airport has been part of the airport sale rumour mill several times before
Reports indicate that the investment fund Global Infrastructure Partners (GIP) is considering the potential sale of Edinburgh Airport in 2023, and that it has informally contacted potential investors.
GIP acquired Edinburgh Airport from BAA in Apr-2012 for GBP807 million, which was 16 times its 2011 earnings.
It is not the first time this rumour has done the rounds over the years, but GIP has always denied any intention to sell Edinburgh. The last time was in 2019, with Brexit about to be finalised.
GIP has been selling in the UK but investing elsewhere
But GIP has been selling or reducing its stake in airports.
In 2019 VINCI Airports acquired a majority 50.01% stake in London Gatwick Airport for GBP2.9 billion in a deal involving a group of investors, including sovereign wealth funds in Australia and the United Arab Emirates. That meant that GIP continues its interest in that airport but with 49.99% of the equity, and VINCI was effectively running the show and determining strategy.
GIP had acquired Gatwick from BAA in 2008 for approximately GBP1.46 billion, before divesting some of the equity to other investors.
In 2016 GIP sold London City Airport to a Canadian consortium for approximately GBP2 billion - nearly three times what it had paid for the facility a decade previously, and at a record-breaking earnings multiple.
Once considered a 'Major Global Investor' in the CAPA Global Airport Investors Database, GIP lost that cache after these sales. On the other hand, it has been involved in other transactions to increase its portfolio.
For example, it is part of the Industry Funds Management-led Sydney Aviation Alliance consortium that acquired Sydney Airport. It is also one of the nine shortlisted investment parties for a 30% stake in Athens International Airport - a deal that has been delayed by the pandemic and might not now go through, as the Greek government assesses other methods of disposing of that stake.
In 2019 GIP was one of 18 respondees (and a sole one, not within a consortium) to a request for qualifications (RFQ) for potential private operators of St Louis Lambert International Airport in the USA.
Other transactions with which it has been linked include the reported intention to acquire a majority stake in Malaysia Airports Holding Berhad (2019), which was denied by MAHB. Also a non-binding bid to purchase a minority shareholding in Mumbai International Airport Ltd (MIAL), the operator of Mumbai Chhatrapati Shivaji Maharaj International Airport, from GVK Airports (2018).
Also in India, GIP expressed interest in bidding on Airports Authority of India's tender to operate six airports under the terms of 50-year concession contracts (2019).
It became an investor in Paine Field Passenger Terminal at Everett Paine Field Airport (Washington State, USA) in 2019. GIP is managing the investment on behalf of the Washington State Investment Board. The airport is operated by Propeller Airports.
Then, in Jan-2021 GIP's Fund IV reached an agreement to acquire the airport FBO operator (Fixed Base Operator) Signature Aviation plc for USD4.6 billion.
Shifting its priorities away from the UK makes sense...
So, it is perhaps the case that GIP is merely shifting its priorities away from the UK.
There were good reasons to suspect that Gatwick Airport could not reach its full potential once it had lost its battle with Heathrow for a new runway in southeast England, and that London City's ambitions were limited both by political opposition (its latest master plan is not actually built on any further expansion) and by much easier access to Heathrow from London City's catchment area - courtesy of the recently inaugurated Elizabeth Line.
...but Edinburgh has consistently performed well
So what has Edinburgh done wrong to prompt the possibility of a GIP exit?
Not much really.
There was steady passenger traffic growth consistently over the course of the past decade, with only one year (2012) negative until the first pandemic year of 2020.
That included 2019, when at many airports in the UK traffic was stable at best, compared to the previous year.
Edinburgh Airport: annual traffic, passenger numbers/growth, 2012-2022 YTD
Passenger numbers recovery outstrips that of Heathrow and Glasgow airports
The 825% growth figure in the period Jan-2022 to Jul-2022 is more than twice the appreciation at London Heathrow (Jan-Sep) and 225 percentage points higher than that of Glasgow International, which Edinburgh has replaced as the primary gateway in Scotland.
In 2019 their respective passenger tallies were 14.7 million Edinburgh - making it the sixth busiest in the UK - and 9.6 million at Glasgow. (Glasgow Prestwick added another 700,000; Edinburgh does not have a second airport).
Trans Atlantic services rival those of Gatwick and Manchester
Moreover, Edinburgh has been adding trans Atlantic services (US and Canada) at a high rate, mainly to satisfy inbound demand to what is the UK's joint second-most visited city after London.
There are currently five North American airports served: four in the US and one in Canada.
The Canadian city, Toronto, was added to the WestJet network with thrice weekly service in Jun-2022, in addition to the incumbent Air Canada.
Edinburgh Airport: network map for the week commencing 17-Sep-2022
Seasonal services not showing on the map above are Chicago - by United Airlines until the end of Oct-2022 - and one by Delta Air Lines to Boston, both of which are expected to return in 2023, the latter as a daily service.
That makes at least seven trans Atlantic cities served, which puts Edinburgh at, or close to, par with London Gatwick and Manchester airports.
Domestically, Ryanair recently announced plans to launch twice daily Edinburgh-London Stansted service from 30-Oct-2022, supplementing the existing easyJet operation.
Capacity has not fully returned, but Edinburgh is in advance of the UK generally
With respect to the recovery from the impact of the COVID-19 pandemic and in keeping with the UK as a whole, Edinburgh has yet to regain the same level of seat capacity as it did in 2019.
The airport is, however, slightly in advance of the UK picture generally, and parity with 2019 could be achieved at the end of Oct-2022.
Edinburgh Airport: weekly total system seat capacity, 2019-2022
Approximately 27% of the capacity at Edinburgh is on international services and more than 72% of it is on low cost flights, which is 18 ppts higher than the average for the UK.
On the other hand - at only 21%, the number of seats on aligned airlines is 10 ppts lower than the UK average.
Ryanair is the leading airline presence, with almost 30% of capacity, followed by easyJet (27.5%) and Jet2.com (9%), with British Airways on 8.8% - mainly on account of high frequency services connecting Edinburgh to London Heathrow.
Edinburgh Airport: system seats, all business models/airlines, week commencing 17-Oct-2022
Long haul airlines put their faith in Edinburgh
There is a reasonable balance in the capacity at Edinburgh. It might be argued that it could do with more full service and aligned airline routes - which are often the same anyway - but long haul airlines do appear to be putting their faith in the airport increasingly.
Whether or not that will be influenced by any decision by the Scottish National Party to seek a second referendum on independence remains to be seen.
With the completion of the east terminus and an associated passenger bridge construction, work is finalised for the time being. The airport is connected to the city centre by a tram service running every seven minutes for most of the day. A rail link was considered but rejected in 2007.
Who might buy it and what would it be worth?
In the past investors and operators such as Brookfield (Canada), Macquarie (Australia), APG (Netherlands) and CKI (China) have been touted as potential buyers, though there is no evidence to support the theory in any individual case.
But there will always be institutional investors who are keen to enter the sector, despite all its trials and tribulations. And especially so from the US right now, with the dollar strong and particularly strong against the GB pound.
It is more appropriate, though, to look to who is engaging in M&A activity in the sector at this stage - for there are few.
VINCI is the most active, with acquisitions in Africa and Latin America recently, but VINCI's control over London Gatwick could lead to competition issues, even if it would merely be replicating what GIP did before it.
Ferrovial, which is rumoured to be considering selling some or all of its majority holding in London Heathrow Airport, is another contender as it is frequently active in the market.
But then, Ferrovial is a 50% owner of Aberdeen and Glasgow International airports (along, incidentally, with Macquarie) via the vehicle AGS Airports (the third airport is Southampton, which features in another CAPA report to be soon published).
So again, there might be competition issues.
IMF, through its subsidiary Airports Group Europe (AGE), is another contender. AGE recently raised its stake in Vienna Airport but only marginally, by 1.78%, not by the 9.9% it had hoped for.
Again, IMF already has roots in the UK, and in a big way, as a 35% shareholder in Manchester Airports Group, which controls Manchester, London Stansted and East Midlands airports
There were several local Scottish bidders when Edinburgh was sold in 2012, including the Edinburgh-based merchant bank Noble Grossart (with Carlyle Group), but none of them is expected to make a return this time. There is nothing to stop Carlyle Group, which today, as CAG, has a dedicated airports arm.
Scottish investors who were active in the sector at the time, such as the bus operator Stagecoach Group, are unlikely to play a part at all. They have had their day.
It is more likely a sovereign wealth fund that would invest in the airport serving Scotland's capital city today - a historic one, with much tourist appeal, and a major financial centre.
In a complicated set of manoeuvrings private equity house 3i drew up a bid in 2012, with M&G Infracapital and the Universities Superannuation Scheme, which is a part owner of Heathrow Airport, and then withdrew it. They will probably not return, but JP Morgan Asset Management, another contender then, possibly could.
Canadian institutional investors, including the pension funds, did not make a play last time, preferring to zero in on London Stansted Airport, but they should never be discounted, and they were heavily involved in the sale of London City Airport.
Outsiders include Fraport, which has coveted UK airports in the past but has never been encouraged by them; Groupe ADP; and possibly Manchester Airports Group (which would then involve IFM/AGE).
Peel Holdings' exit from Doncaster-Sheffield Airport (which is still not finalised) could tempt it to look elsewhere, but Peel typically manages smaller airports wedded to mainly low cost activity.
Difficult to pin down a valuation
As for its value, average earnings (EBITDA) multiples were around 19x before the pandemic, with some outliers such as London City and some of the Brazilian transactions much higher.
Edinburgh's EBITDA in 2019 was GBP139.2 million. Employing the 19x calculation, that would value it at GBP2.6 billion. If a calculation was based on FY2020 (EBITDA GBP12.8 million) it would be just GBP243 million.
There have been some wild estimates valuing it at well over GBP3 billion - but based on what, exactly?
While traffic is recovering, the Ukraine war drags on with no end in sight and the UK (and much of the western world with it) braces for a winter determined by a cost of living crisis that could last long into 2023.
Like it or not, such factors do influence transport infrastructure prices.
The last time an Edinburgh Airport sale rumour was circulating, in Apr-2019 before COVID-19 arrived, the price was thought to be around GBP2 billion, which seems a lot closer to the mark today.