Alternative Investors Making the right choices

KPMG INTERNATIONAL

GLOBAL TRANSPORT

Alternative Investors: Making the right choices

Contents

Foreword

Activity overview

But why now?

Funds: both sides of the coin

How KPMG can help

Our experience

© 2007 KPMG International. KPMG International provides no client services and is a Swiss Alternative Investors: Making the right choices 1 cooperative with which the independent member firms of the KPMG network are affiliated.

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Foreword

Global investment in the transport industry has never been greater, with aviation, port, bus, road and railway assets all being acquired. Interest comes at a time of record levels of mergers and acquisitions throughout industries and markets globally.

An increase in competition for assets has occurred as the focus of private equity, hedge, real estate and infrastructure funds (commonly known as ‘funds’) has converged within the transport sector. This has resulted in a dramatic increase of capital targeting a scarce supply of assets. It has also broadened the definition of what can be thought of as “infrastructure”. One of the key drivers behind funds’ interest in transport lies in the nature and quality of the net revenue stream it can offer. It is becoming clearer that these features can also be present in transport entities with little traditional or fixed infrastructure.

Within the funds industry, an increased availability of money from pension funds, combined with accommodating debt markets, has meant that funds’ spending power has never been greater. However, their increased profile has also bought with it a level of sensitivity and attention, with both the shareholders and employees of targeted companies unsure of whether the interest of funds is positive or negative.

As more funds have been chasing a finite number of assets, prices being paid have risen, which has in turn placed pressure on the returns achieved from these investments. Funds have been forced to look for improved returns in the less traditional transport infrastructure areas such as shipping, rail, logistics and aviation, while accepting that these may have an increased risk profile.

Whether you are an existing transportation or transport infrastructure company, KPMG’s global network of firms has the experience and knowledge to assist you. The KPMG team strives to deliver clear, pragmatic advice to enable you to make the right choices as opportunities in this market continue to emerge.

If you have any queries on this, or any of our services to the wider transport industry, please do not hesitate to contact us directly.

Dr. Ashley Steel Global Chair – Transport KPMG LLP (U.K.)

Nick Chism Global Infrastructure and Projects Group KPMG LLP (U.K.)

Tony Rocker Alternative Investments Group KPMG LLP (U.K.)

2 Alternative Investors: Making the right choices © 2007 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.

“In recent months, funds have played a more active role in this space, with a number of high-profile deals throughout the spectrum of transport assets.”


Activity overview

In the last 18 months there have been a number of high-profile transactions taking place across transportation and transport infrastructure sectors, with investors keen to exploit reliable income streams and take advantage

of liquidity in the debt markets. As the market has developed, prices have been pushed up dramatically and we have seen price x earnings multiples increase by as much as 15 times in certain sectors. This does not mean

that the funds always have it their own way. As the activity table makes clear, funds have not always won against traditional trade buyers.

Sector Date Asset Acquirer Consideration (US$m)

Aviation October 2006 Icelandair Group Investor Group 514

Aviation October 2006 London City Airport AIG/GE Capital/Credit Suisse Infrastructure fund 1,430

Aviation June 2006 BAA plc Consortium led by Ferrovial 29,620

Aviation January 2006 Smartcard Macquarie- Black Diamond Capital Management 270

Bridges & Roads January 2007 A65 motorway (France) Eiffage/Sanef 1,460

Bridges & Roads January 2005 Chicago Skyway Toll Bridge Cintra-Macquarie consortium 2,151

Bus June 2006 Stagecoach London Macquarie 505

Logistics August 2006 TNT NV-Logistics Division Apollo Management LP 1,896

Parking December 2006 Chicago Downtown Public Parking System Morgan Stanley 563

Parking November 2005 New York off street parking – Icon Parking Macquarie led consortium 634

Ports & Shipping May 2007 Mersin Port (Turkey) Singapore PSA International & Afken consortium 755

Ports & Shipping August 2006 ABP plc Goldman Sachs 6,575

Ports & Shipping March 2006 P&O DP World 8,720

Sources: Thomson SDC, Infrastructure Journal, Infra-News, KPMG in the UK (2007)


But why now?

The demand for transport is growing as more countries industrialize, greater numbers of people travel, globalization increases international trade volumes and changes in governments’ policies favor investment. Additionally, the threat of terrorism, changing regulatory standards, and the importance of environmental management have all impacted the market. One area where this has been seen is in the aviation sector which has witnessed a dramatic rise in M&A activity with airlines (Alitalia and Iberia) and airports (Leeds, London City and Budapest) all seeing interest from funds.

The rise of interest by funds within this industry can be attributed to a number of factors:

Why the number of funds

are increasing

• Increased capital available from pension funds due to changing demographics and pensions legislation in some countries.

• A strong global economy has supported a period of historically low interest rates.

• Increased competition in the debt markets has resulted in lower margins and a reduction in covenants on financing.

• This rapidly maturing market means banks have a better understanding of the infrastructure market, enabling them to price the deals more accurately and occasionally involve themselves in deals through bridge equity.

Why the funds are targeting

these assets

• Mature assets held for the long term.

• Stable cash flows linked to inflation.

• Secure revenue streams from contracts typically with Government Departments or local authorities.

• Assets are often monopolistic in nature.

• Highly regulated industries.

• Limited commercial, market or operational risks.

• Low correlation with other asset classes.


Funds: both sides of the coinThere are a number of advantages and disadvantages to the involvement of funds in this industry. Some of the main considerations are expressed below:

Advantages

• The lighter regulatory, reporting and governance environment of a privately owned company (especially in comparison to one that is government owned or stock market quoted), allows senior management to focus on the company.

• Funds bring with them highly experienced management teams that have in-depth knowledge of the industry and the key factors that it faces.

• Experienced management is able to crystalize opportunities and focus on long term value creation through a highly structured business plan and performance driven remuneration.

• Funds have significant levels of capital available allowing them to support investment targets.

• Funds are expected to continue to pay high premiums for strong well managed assets.

Disadvantages

• High gearing of the company or assets increases the risk of insolvency.

• The impact of effective cost management on the work force may lead to challenging negotiations with unions.

• Negative publicity of fund ownership may affect the brand name of acquisition targets.

• Changes in strategy could potentially result in only the core assets being retained which may be perceived as “asset stripping”.

• Shareholders may experience lower than hoped offers for their holdings as nationalistic attitudes may adversely affect the ability to attract foreign financial consortiums, thus limiting the number of bidders involved and ultimately impacting on the premium paid for target assets.


How KPMG can help KPMG firms offer a broad spectrum of professional services to companies involved in this sector. Our deep understanding allows us to offer an informed and insightful view of the key challenges facing the industry from both investor and target company viewpoints. Some of the ways that we can provide assistance include:

• Advising on mergers and acquisitions, from strategic analysis through to financial and taxation due diligence.

• Providing advice on understanding whether a potential acquisition approach provides best value, including shareholder options.

• Providing post-transaction services such as operational audits, assessment of health and safety programs and review of Corporate Social Responsibility (CSR) reporting preferred practice.

• Providing advice on major ‘growth’ projects such as capital investment programs, property redevelopment and improving surface access to transport infrastructure assets.

KPMG’s member firms can help clients by providing bespoke support to work towards successful outcomes.

Key services include.

Corporate finance:

• Mergers and acquisitions support

• Financing of capital investment programs

• Advice on entry and expansion strategies

• Advice on regulatory issues such as bid defense

• Project finance and public private partnerships

Transaction services:

• Due diligence

• Tax and accounting structuring

Property advisory services:

• Advice on redevelopment and regeneration projects

• Consideration of surface access issues

Debt advisory services:

• Funding structures, including securitization

• Financial modeling

Post-transaction services:

• Environmental, health and safety audits

• Operational and IT audits

• Statutory audits

• Accounting advice

• Regulatory advice

• CSR reviews

• Assessment of programs and management activity


Europe, Middle East & Africa Dublin Metro Rail National Roads Authority (ongoing) (ongoing) Financial adviser to the Railway Irish National Roads Authority (NRA) Procurement Agency (RPA) on the 2 billion euro PPP roads program. Key role planned Dublin Metro Rail System in the development of policy for the NRA with a tailored approach to the and assisted in the development and characteristics of the Dublin Metro application of a financial evaluation model and the Irish PPP framework. and a public sector comparator.

Limerick Tunnel London City Airport (2006) (2006) Business adviser on the 400 million Vendor due diligence for the euro tunnel under the river Shannon disposed group. in Ireland.

Exeter Airport Permira (UK) (2005) (2005) Financial and strategic advisory Provided due diligence for Permira services. in their acquisition of a major stake

in Jet Aviation.

Americas Texas Department of Transportation – Trans-Texas Corridor (Ongoing) Financial advisory services to the Texas Department of Transport to provide commercial and financial advice on their PPP program.

ANC Group (2006) Acted as financial adviser to Lloyds TSB Development Capital and the management shareholders on the sale of ANC Group to FedEx Corporation.

Golden Ears Bridge – Vancouver (2002-2006) Business adviser to Translink on a C$1.1billion private finance deal for the bridge.

Virgin Atlantic Airways (2005) Financial adviser in sale of US ground handling business to WFS.

Rock-It Cargo (2004) Acted as financial adviser to Rock-It Cargo on its recapitalization, including the raising of mezzanine financing.

Awards Project finance MagazineKPMG member firms Awards

Transport and Infrastructure KPMG member firms Financial Adviser of the Year 2006 European PPP Public Private Partnerships Deal of the Year

Adviser of the Year Limerick Tunnel Deal 2007 Winner 2006 Winner

Awards Awards 2006 KPMG member firms KPMG member firms

Transport and Infrastructure 2006 Global Deal of the YearFinancial Adviser of the Year Golden Ears Bridge Deal

Global Financial Adviser of the Year

2006 Winner 2006 Winner

Awards Awards 2006 KPMG member firms KPMG member firms

Public Private Partnerships 2006 Transportation Adviser of the Year and Infrastructure

Financial Adviser of the Year

2005 Winner 2006 Winner

Our firms’ experienceOur team operates on a global basis

with strong industry experience.

KPMG firms have solid fund

credentials, and our international

experience includes acquisition

and financing strategies, regulatory

issues and contract negotiation,

as well as due diligence and tax.


DPWN AG DP World Englefield Capital (PE) & Ferrovial (2006) (2006) International Port Holdings (2006) (2006) Acted as financial adviser to Provided purchase price allocation Due diligence in respect of the part Due diligence assistance in DPWN AG on the acquisition services under International acquisition of Great Yarmouth Port. connection with Ferrovial’s of Williams Lea Group Limited. Accounting Standards in connection successful US$30 billion bid for BAA.

with the Company’s acquisition of P&O.

Attiko Metro, Athens Metro Hungarian State Property AFSINAG (Germany) DHL UK Extensions (2004-06) Agency (Hungary) (2004-06) (2005) (2005) Financial and commercial adviser Provided advice on the privatisation of Advisory services regarding Acted as financial adviser to DHL to Attiko Metro on three planned a major river port in Budapest. KPMG PPP projects. Distribution Holdings (UK) Limited extensions to the Metro of Athens recommended a privatization strategy; on the sale of Fuelserv Limited including advising on the balance structured the transaction; prepared to ReD plc. between public and private sales related documents; contacted financing and project governance. potential investors and evaluated bids.

Sagard Private Equity Tuffnells Parcels Express Warnow Crossing road tunnel 3i (2005) (2005) (2005) (2005) Assisted Sagard Private Equity Acted as financial adviser to the Refinancing and model review Provided commercial due diligence and its management team on shareholders of Tuffnells Parcel advice to Macquarie and a in UK£193 million acquisition of the acquisition of CEPL (OBO). Express on its sale to management consortium of banks. Aviapartner from Belgian private

and the Bank of Scotland. equity firm Sonfinim.

Asia Pacific Bahrain Ports Privatization

Advised Bahrain’s Ministry of Finance and National Economy on the privatization of the existing Mina Salman Port and the new Khalifa bin Salman Port.

China Ports Privatization

Assisted China’s largest port operator on the potential restructuring of a significant portfolio of port assets.

Port of Melbourne

Advised the Victorian Government on ownership and operating structures for the former Port of Melbourne Authority.


kpmg.com

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

Corporate finance services, including Financing, Debt Advisory, and Valuation Services, are not performed by all KPMG member firms and are not offered by member firms in certain jurisdictions due to legal or regulatory constraints.

For more information

please contact:

Dr Ashley Steel

Global Chair – Transport KPMG in the U.K. Tel: +44 20 7311 6633 Email: [email protected]

Nick Chism

Partner KPMG in the U.K. Global Infrastructure and Projects Group Tel: +44 20 7311 8603 Email: [email protected]

Tony Rocker

Partner KPMG in the U.K. Alternative Investments Group Tel: +44 20 7311 6369 Email: [email protected]

Joe Short

Global Executive – Transport KPMG in the U.K. Tel: +44 20 7311 2637 Email: [email protected]

© 2007 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

Designed and produced by KPMG LLP (UK)'s Design Services

Publication name: Alternative Investors

Publication number: 306-393

Publication date: May 2007

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Alternative Investors Making the right choices