GIP and Edinburgh Airport: airports on an upswing

When it was announced last month that Global Infrastructure Partners had agreed to pay £807.2 million (US$1.3bn) to BAA for Edinburgh Airport, some media commentators were caught by surprise.

However, this seems to have more to do with wild underestimates of the value of the asset than with the seller pulling off a miracle. One British newspaper estimated the sale price at between £400 and £600 million, which at the lower end would have translated to an EBITDA multiple just over eight, lower than any major airport acquisition in recent years. This publication, on the other hand, cited a source at the start of the process as saying that it could go for a multiple of as high as 16x. In the end, it went higher: about 16.7x based on EBITDA to December 2011 of £48.3 million.

Certainly nobody sounded too shocked. Andrew Briggs, infrastructure partner at Hogan Lovells, remarks: “People I’ve spoken to were surprised. It wasn’t way off the scale but it was at the upper end. It’s not as high as it might have been six years ago and appetite for this type of asset will come and go. It’s all about what price the equity investor is prepared to reach.”

Another view, from inside the deal: “The price doesn't surprise me. I don’t think it’s an asset that has a lot of growth in it, but it’s a good asset. It’s high, but in our view that’s what you’d have to pay.”

So how does the sale of Edinburgh compare to other deals?

Value to EBITDA

*EBITDA at last full-year accounts

**Asset swap. Debt refers to debt at holdco reported in H1 2011

Judging by the table, fairly well for the seller. GIP’s last airport acquisition was London Gatwick Airport in 2009. Like Edinburgh, it was a capital city airport acquired in a forced divestment by BAA, and it went for £1.51 billion, an EBITDA multiple of just 8.94x. But this was in a time of great turbulence on the markets and poor performance at all airports. Gatwick reported 30.24 million passengers between January and November 2009, a 5.73 per cent fall on the same period in 2008.

Deals before and after Gatwick show a closer relationship to Edinburgh: the asset swap between MAp Airports and Ontario Teacher’ Pension Plan in July 2011 valued Brussels Airport at 13.3x EBITDA and Copenhagen at 15.2x, while BAA’s divestment of a majority stake in Naples Airport in December 2010 is placed at about 13.3x.

According to IJ News reports, Gemina’s acquisition of the 45 per cent of Aeroporti di Roma it did not already own – taking it to nearly 100 per cent – valued Rome’s two main airports at 16x EBITDA in June 2007.

Earlier that year, GIP acquired London City Airport for 27.6x EBITDA and Bridgepoint Capital reportedly secured 100 per cent of Leeds Bradford Airport for 27x. Such high multiples look unlikely to be repeated now in more sober times, even with a sharp upside in traffic.

Is it worth it?

As one source noted to IJ News, Edinburgh has gone for the highest EBITDA multiple of a comparable airport since the crisis, but there have not been many such deals and they were not all major capital city airports, nor all 100 per cent acquisitions, both of which will have helped boost the sale price.

In any airport acquisition, growth potential is a key consideration. Andrew Briggs comments: “I imagine that the growth story was pretty key, otherwise the implied return on the multiple is fairly low. Theoretically, GIP could have dropped their hurdle or but I suspect that their valuation is driven by is the fact they see a growth upside.”

Indeed, GIP is understood to have communicated just that to its banks – in spite of some scepticism (see above) that Edinburgh has limited growth. The airport is not near capacity and has less controversy surrounding air traffic than Heathrow or Gatwick airports. GIP may intend to encourage flyers between London and Scotland to ignore Heathrow – for which Edinburgh is the busiest domestic destination – and fly from Gatwick instead.

Also acting in Edinburgh’s favour is the unregulated landing charges at the airport: unlike Heathrow, where such charges are regulated by the Civil Aviation Authority, at Edinburgh the operator is free to negotiate charges with airlines. They are a major source of revenue, totalling £1.3 billion at Heathrow last year according to reports.

Debt to EBITDA

Taking Edinburgh’s last reported full-year EBITDA figure of £48.3 million, the £350 million of five-year acquisition debt facilities raised for the sale amounts to a multiple of 7.24x. This is line with anecdotal suggestions that “anything on the cusp of investment grade goes for six or seven times”.

It is higher than some recent deals, but not by much. GIP amassed £1.125 billion of debt for Gatwick Airport in 2009, a multiple of 6.66x. The refinancing of Copenhagen Airport last year saw the airport’s debt to EBITDA stand at 5.2x. To find a much higher multiple, it is necessary to go beyond the 2008 financial crisis: GIP’s acquisition of London City in 2006, for example, saw it raise £490 million of debt, a debt to EBITDA ratio of 18.2x.

The great variation in the amount of leverage in each individual deal underscores that EBITDA, not leverage, is the key driver of airport acquisitions. GIP is paying mostly in equity for Edinburgh – £457.2 million of it – but nobody would consider its offer a pessimistic one.

Overall, the Edinburgh sale can be placed in a trend of rising EBITDA multiples for acquisition value and debt. It points to rising market confidence in the ability of airports to generate growth since the crisis. This may influence the bidding for Manchester Airports Group, the next airports asset in the UK readied for divestment.

• Thanks to Muhabbat Mahmudova for help with this article