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Corporateand InvestmentBanking
New Lisbon airport project
Conditions and possible structures for a successful airport privatisation
Lisbon November 22 nd
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Section 2 Main structure issues and options for a successful privatisation
- capital and corporate governance- perimeter of the transaction- contractual framework- investment obligations- tariff regulation - tender process
Section 1 Market conditions : a favourable environment reflected in high transaction prices
Introduction Meeting public authorities and private investors objectives
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The conditions to a successful airport privatisation
Meeting public authorities and private investors objectives
Public authorities often aim at several objectives when privatising airports, which can sometimes be conflicting :
choose the best operator able to implement an ambitious development for the privatised airport
optimise transaction price and fund new infrastructure developments keep a degree of control over major issues having political implications : tariffs,
employment, environment, safety and security… preserve the financial robustness of the airport company implement a rapid and transparent transaction
Equity investors and banks have quantitative objectives depending from market conditions but also qualitative requests regarding investment risk :
achieve a satisfactory return on equity, which usually requires the implementation of a high financial gearing
obtain an adequate level of control over their investment through a satisfactory transaction structure
benefit from a sufficient visibility over regulatory frameworks (tariffs, environmental and social constraints.. )
The transaction structure and the tender process should be designed to satisfy the objectives of both public authorities, private equity investors and lenders given current market conditions.
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Market conditions : a favourable environment reflected in transaction prices
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A favourable market environment : equity investors
Airport privatisations today usually trigger a fierce competition between bidders : typically 10 competitors participate to the 1st round (case of Brussels, Budapest, Malta..) which enables to select 4 to 5 bidders for the 2nd round
Competition has been reinforced by the arrival of new comers willing to build up rapidly credible positions in the sector :
Major airport operators looking for new sources of growth : BAA, Fraport, Copenhagen, Vienna Airport…
Secondary airports trying to reach a critical size : SAVE, Vancouver, TAV, Nice… Financial investors dedicated to infrastructures and implementing high debt
leverage on investments providing a high visibility : Macquarie, IFM, Deutsche Bank, Hastings …
Construction groups interested in civil works fall-backs but now also willing to position themselves as concession groups : Hochtief, Ferrovial, Vinci, Abertis...
Consortiums are usually set up to combine competencies and increase available equity and are often complemented by :
Local partners attracted by low risk and high political visibility of the project Pension funds interested by high returns / low risk over a long period : OTPP,
CDPQ, OMERS…
Investors currently expect returns on equity between 10 % to 15 % for high leveraged transactions equivalent to 6 % to 9 % return on assets
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A favourable market environment : debt providers
Low level of interest rates available on long term maturities
Strong appetite of banks for infrastructure projects :
Acceptance of high level of gearing if the airport is a quality asset and if the transaction is well structured :
Debt / Ebitda multiples up to an initial 12 to 15 X (Chicago motorway) to be decreased to lower level at project maturity
Debt Service Coverage Ratios up to 1.5 X (Brussels airport) after the construction period
Maximum debt redemption period up to 20 to 30 years with a minmum 10 years «tail of concession»
Low interest margins for quality projects
Airport transactions are usually financed by senior bullet medium term debt (5 /7 years)
Projects can be later re-financed at better conditions after the implementation of the operator strategic plan and the opening of new infrastructures through the issuance of AAA rated long term bonds guaranteed by «monolines»
Additional sub-debt can be provided by banks and specialised institutions to decrease the amount of equity needed
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A favourable market environment : high transaction prices
Transaction multiples for last significant airport acquisitions
Financing commitment for recent airport BOT projects
Airports Date Acquirers
Investments realised
and to come€m
Numberof
passengersin millions
Duration of
concession
Concession fees
Athens 2001Greek Government: 55%
Hochtief : 45%2 100 13,6 in 2004 25 years
Bulgaria 2005 Kobenhavns Lufthavne: 100% 140 2,7 in 2004 35 years 30%
Cyprus 2005
Aer Rianta / Bouygues BatimentNice chamber of commerce and industry
Egis / Vancouver Airport Services500 10 in 2007e 25 years 33%
Albania 2005Hochtief : 47%
Albanian American Fund: 21.3%DEG Deutsche: 31.7%
83 0,6 in 2005e 20 years600 €m
over 20 years
Date Target Acquiror(s) % AcquiredImplied FV
in USD millionFV / Sales x
FV / EBITDAa x
2002 Malta International Airport Malta Mediterranean 40% 182 5,1 x 13,8 x2002 Sydney Airports Corp Ltd Southern Cross Airports Corporation Consortium 100% 3 186 12,3 x 17,7 x2003 Aeroporti di Roma Macquarie Airports 45% 2 673 5,2 x 13,9 x2003 Belfast city airport Grupo Ferrovial SA 100% 69 3,6 x 23,6 x2004 Brussel airport Macquarie Airports 100% 1 635 5,8 x 12,65x2004 TBI PLC Airport Concessions and Development Ltd 100% 1 236 3,4 x 13,4 x
Average 5,5 x 12,7 x
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Main structure issues and options for a successful airport privatisation
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Control and governance
Different structures are feasible as evidenced by past transactions : full privatisations : Bristol, East Midlands, Sydney… minority stake retained by the State : ex Brussels, Budapest, Malta… majority stake controled by public authorities : Athens, Newcastle, Duseldorf, Hanover,
Hambourg, Milan…
Public authorities often whish to retain a residual shareholder position : to exercise control over major issues having political implications (tariffs, employment,
environment..) : objective also achievable through an appropriate regulatory framework and obligations defined in the operating licence
to benefit from the valuation upside after the implementation of the operator strategic plan
Private investors require a sufficient control over operations, infrastructure development and major financial decisions :
approval of management nomination, budgets and dividends distribution development plan agreed on before the transaction with a veto right from
authorities over major decisions not included in the development plan.
Deals only offering a minority shareholding usually attract less interest
The possible evolution of the structure should be considered : Put option negotiated before the transaction on the basis of the future profitability of the airport Later IPO to preserve visibility and independence of the airport company after a decrease of
the initial amount of debt linked to the transaction
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Perimeter of the transaction
Inclusion of regional airports ; small regional airports (below 1M pax) are often not profitable. The rare privatisations of regional airports packages were focused on knowledge transfer rather than financial proceeds (Mexico, Egypt…)
Their previous exit form the transaction perimeter can be coupled with a management contract to : improve the profitability of the proposed airport company, preserve synergies linked to a joint-management enable public authorities to continue invest in regional airports strategic for the territory
development
The inclusion of small secondary urban airports in the privatisation package can enable private operators to master competition and differentiate services for LCC airlines (ex Bergamo airport near Milan, Trevise near Venice...)
On the contrary, the co-existence of two large airports usually decreases profitability and airport connectivity: the closing of the old airport should therefore be considered in the case of greenfield projects
Service activities (such as handling, security, bussing..) provided by the airport company can be sold or out-sourced to a subsidiary, before or after the transaction
Handling activities are not considered strategic by most airport investors due to their difficulties to compete with independent players enjoying lower staff costs and higher labour flexibility
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Contractual framework
Asset ownership is not critical for investors; airport privatisations can be structured under two different forms :
full transfer of airport assets ownership associated with an operating licence (return of assets whent licence expires or due to the private investor default.
concession regime : long term lease of existing assets and transfer of new assets built by the concessionaire to the State at the end of the concession
Lenders should be granted «step-in-rights» in case of default from operators
A long term horizon should be given to investors compatible with required investments
Strong obligations can now be imposed to private operators regarding the quality of services provided at the airport :
Quality of airport services can today be precisely measured using standards established by international organisations (ICAO).
Penalties can be imposed to operators linked to : - compliance with ICAO service levels
- availability of assets (closure of runways, terminal gates..)
- level of passengers satisfaction measured by regular IATA surveys
Payment of penalties are guaranteed by performance bonds delivered by the lenders or the shareholders
Early termination can be contractualised in case of major default; a fair indemnity should be provided to enable debt repayment
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Investment obligations
Soft investment obligations enable equity investors to maximise value in the case of mature airports which do not require heavy investments in the short term :
submission of an indicative master plan investment obligations only constrained by the respect of minimum service
levels defined by ICAO low level of minimal amount of investment with flexibility on timing depending
on traffic evolution
A more constrained process can be implemented for airports with major infrastructure project developments :
submission by bidders of detailed projects on the basis of guidelines provided by Civil Aviation (terminal and RWY capacity …)
contractual commitment to execute the proposed project in a defined time-frame signature of a «turn key» construction contract coupled with the airport privatisation
+ enables to obtain firm commitments from banks on the financing of new projects as well as better financial conditions as the risks taken by constructors are fully defined
+ provides a full visibility over the quality of new infrastructures and their implementation
- requires a longer tender process and can only be implemented if the period for infrastructure works is not too long
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Investment obligations
The contractual framework should clearly split project responsibilities and risks between the different parties according to their capabilities to manage them :
Public authorities responsible for : - planning consent and authorisations - acquisition of lands- construction of access infrastructures - providing adequate service regarding air traffic control, police and
custom - closing of old airport infrastructure including manangement of its
possible social and environmental consequences
Private Investor mainly responsible for the new airport conception and its operations
Civil contractor responsible for the completion of infrastructure works in time and for the contracted cost
Indemnities should be paid to the private investor if delays occur for completion due to the default of public authorities
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Tariff regulation
Tariff regulation should be precisely defined to grant sufficient visibility to lenders and equity investors : evolution of tariffs usually defined for the next five year period following the transaction
Tariff policy needs to balance commercial and financial objectives : finance new infrastructure through tariff increases (ex: Athens tariff increase) keep the airport competitive : potential competition of other airport in the
catchment area, competition for hub and cargo traffic enable the development of Low Cost traffic : ability to differentiate tariffs
according to provided level of services
The regulatory framework should define guidelines respecting ICAO and IATA recommendations :
principle of fair return over investments scope of regulated revenues : only aviation revenues derived from a
monopoly position (dual till regulation system preferable to single till) option choosen regarding the tariff setting process :
- negotiations with airlines - application of a tariff formula by an independent regulatory body - discretionary appraisal by civil aviation based on general principles
A mixed approach combining the consultation of airlines with minimum tariff evolution guaranteed by a formula can provide both good visibility and acceptance from airlines
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Tender process
Airport privatisations can last from 8 months (Brussels)…to 4 years (Cyprus): delays are mainly due to preferred bidder dismissals or litigations (from eliminated candidates, unions..)
Define transparent tender rules in line with Government objectives qualitative offer separated from financial offer individal weigthed qualitative objectives : proposed development plan, management team,
experience in addressing the airport key issues, proposed investment commitments…
Define a clear legal framework for the transaction through a careful preparation and enable a possible feed-back from bidders
Maximise competition between bidders adequate publicity of the deal evidencing a strong political willingness to implement the
transaction (non deal road show) respect time schedule and avoid slippage provide feed back to bidders on their positioning keep competitive pressure until signing
Airport is a complex business : a thorough due diligence is needed by bidders to elaborate the best business plan and raise a high level of debt which are keys to maximise price
second round with limited numbers of participants large access to management and site visits vendors due diligence on traffic forecasts, insurances, environment…