Despite some $800m of excess cash on the balance sheet, MAp Airports’ directors are seriously considering a low-ball offer for two of their three remaining airport investments. There is some method in the madness.
At 11pm on September 11, 2001, I was watching television on level 12 of Macquarie’s 1 Martin Place headquarters. We were due to lodge a bid for Sydney Airport in one week and were doing the usual all-nighters to get everything in order. Many around the world had much bigger things to worry about but, for me, planes sailing in to the twin towers meant 6 months of work got thrown in the bin.
The Federal government cancelled the privatisation process and didn’t kick things off again until March 2002, by which time we had to start from scratch.
By the time we had submitted the winning bid a further three months later, I knew everything there was to know about Sydney Airport. Ever since, I’ve wanted to own it.
Like the Turkish Delight in a box of Cadbury Roses, you could buy Sydney Airport but you had to take the crap that came in the same package. A Macquarie management contract was the Orange Crème that nobody wanted, and the collection of other airports was like the Dairy Milks; you wouldn’t say no but they were clearly second rate.
In the past few years that has changed, almost exclusively for the better. First, they sold the Italian airports over which they couldn’t exert any influence. Management’s strategy is capitalise on the latent retail opportunities at the airports. If people are hanging around waiting for flights, they might as well be shopping. You can’t execute your strategy, though, if you don’t have control.
Second, management has been internalised (albeit at an unnecessarily exorbitant price). Third, minority stakes in Japanese, British and Mexican airports were sold. And now, finally, MAp is being given the chance to swap its stakes in Brussels and Copenhagen for a further 11% of Sydney. If the deal goes through, you’ll be able to buy pure Sydney Airport, just what I’ve always wanted.
Unfortunately, Ontario Teachers’ Pension Plan's offer – its 11% stake in Sydney plus $850m cash in exchange for MAp's stakes in Brussels and Copenhagen – isn’t overly generous. The total price equates to $1.65bn if you value Sydney at the latest directors’ valuations. That’s a 15% discount to the same directors’ valuations of Brussels and Copenhagen.
As we’ve seen with Foster’s, though, having the right structure and incentives in place is often more important than bickering about the last dollar. Both European airports are going to require a serious injection of equity when their current debt facilities expire in 2012 and 2015. Letting someone else deal with that problem allows MAp management to focus on what is clearly the superior asset.
Adjusting for the cash MAp will have if the deal proceeds, the current price implies a multiple of 14 times last year’s Sydney Airport earnings before interest, tax depreciation and amortisation (assuming an 85% interest for MAp). That’s no bargain, but the fact that it’s one of Australia’s best businesses will be clear for the world to see.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.