This month saw the financial close of a unique deal in the airport sector, the asset swap between Ontario Teachers’ Pension Plan and MAp Airports. The deal was unique in the sense that it did not require any bank financing, perhaps a blessing in the current climate, but saw the swap of assets between fund managers.

While there are concerns over the contraction of the banking market, and the potential for this to slow down future airport deals, the “swap deal” is not likely to become a common phenomenon. What is more interesting in this case is the future of MAp as a fund that invests in airports.

Sydney is now the fund’s only airport asset, and while this may sit well with its largely Australian shareholders, it raises the question of whether it will invest in more airports - and if not, who will take its place in the airport sector? That is a question that remains unanswered.

The context

The asset swap with Teachers’ offered MAp the unique opportunity to increase its stake in Sydney Airport, its best performing asset, and receive a significant cash payment.

Sydney Airport is Australia’s busiest airport, servicing 37 international airlines, eight domestic and regional airlines and 11 dedicated freight carriers. It is the operations base for Qantas, Australia’s largest domestic and international carrier. Its EBITDA has grown by 10.6 per cent per annum since June 2002, while passenger traffic has grown 4.8 per cent per annum over the same period. It handles 35.6 million passengers annually, of which 11.3 million are international passengers. 

“This level of growth compares favourably against the performance of global peers,” said a MAp spokesperson. “Importantly, Sydney Airport has significant growth potential and is well placed to take advantage of the wider industry trends such as the continued expansion of low cost carriers, new aircraft technology that delivers bigger planes, airline alliance expansion and integration, and the liberalisation of air rights.”

The deal

MAp first announced that it was selling its stake in Brussels and Copenhagen airports via a swap deal with Canada’s Ontario Teachers’ Pension Plan for Sydney airport in June. In July IJ News reported that the pair had reached a binding agreement for the swap deal, and the deal finally closed at the beginning of October. 

The transaction saw MAp hand over its 30.8 per cent stake in Copenhagen airport and 39 per cent stake in Bristol airport to Teachers’ in return for its 11.02 per cent stake in Sydney airport, and an additional cash sum of A$791 million (US$814m). The combined value of the Sydney stake and cash payment comes to A$1.58 billion (US$1.63bn), somewhat below the A$1.94 billion (US$2bn) valuation MAp put on its Copenhagen and Brussels stakes last December. 

MAp now holds an 85 per cent stake in Sydney airport, which is now the only airport in the MAp portfolio.

The deal also brings Teachers’ back into Copenhagen airport. It sold its 3.9 per cent stake to MAp in early 2010. Teachers’ also owns a 48.25 per cent stake in Birmingham airport and a 35.5 per cent stake in Bristol airport.

A one-airport fund

Following the deal, Sydney will be MAp’s only airport asset. One banker said he could see how the deal made sense from MAp’s point of view given the pressure the fund was experiencing from shareholders to reduce its discount to NAV.

MAp funds have been trading at a discount for a long time. There is likely to have been pressure from shareholders to do something about this. Following the deal the fund will now hold an entirely Australian asset, which should fare better with investors.  

MAp is hoping that following the deal, the fund will display a clear and simple investment proposition for investors.

“From our perspective, we’re hoping the singularity of MAp’s new focus will generate a better understanding of Sydney Airport’s intrinsic value and underlying growth among investors and the wider market,” said a spokesperson from the fund.  

The question that now arises is the future of MAp. Will it simply remain as a majority shareholder in Sydney airport or will it look to invest in other airports? Ownership restrictions in the airport sector in Australia mean it is unlikely that MAp will invest in other Australian airport assets.

“At this stage, we have no intention to make further airport acquisitions due to our strategic shift to focus solely on Sydney Airport” said a spokesperson for MAp.

It seems for now that Sydney will be MAp’s sole focus.

Conclusion

On a wider scale, the deal demonstrates the continued interest in the airport sector from funds. There have been a number of deals flying around the airport sector recently, many of which have seen fund managers in the bidding.

Just this month Ferrovial announced it was to sell a 5.88 per cent stake in UK airports operator BAA to Alinda Capital Partners for €325 million (US$437 million).

Hochtief is also in the process of selling its airport business, which includes stakes in Athens, Budapest, Sydney, Tirana, Hamburg and Dusseldorf airports. Despite initial fund manager interest in the business, the consortium of Fraport and RREEF, and Allianz and GIP pulled out of the bidding in September. Vinci and HNA, the parent company of Hainan Airlines, remain the only interested parties. 

A number of funds have also registered an interest in the Spain’s airport privatisation. 

Just recently BAA put Edinburgh airport up for sale. One banker said he expects the airport to yield a significant amount of interest from the funds sector. In order to bid for the airport, fund managers will need to have airport operating expertise, so the expectation is that those without existing airport assets will team up with developers to bid for the project.

However, the grey cloud of economic recovery and post-crisis regulation continues to loom, and many in the industry have raised concerns over securing bank debt for infrastructure projects. The influence of macroeconomic factors and the impending banking regulation, Basel III, has led to constraints in bank lending on projects. One banker said he was sure this would cause airport deals to be delayed.

Earlier this month Spain’s national airport operator Aena proposed the postponement of the bidding for the privatisation of Madrid and Barcelona airports by three months. Aena said that the delay was due to “the request from the companies participating in the contest owing to the difficulties of assembling the necessary finance by the established date”.

The MAp/Teachers’ swap deal eliminated the issue of bank debt but it is not likely that deals like this will become commonplace. For one thing, although bank markets are constrained, things are not that bad, said the banker.

It is also difficult to do these sorts of deals if the two parties do not already have existing relationships. Swap deals hinge on both parties agreeing on the valuation of an asset and this can be troublesome. As one banker said, this deal worked due to the existing relationship between Teachers’ and MAp.