Last week Sydney Airport, Australia’s largest airport and one of Australia’s most well-supported listed infrastructure holdings, received an unsolicited bid to take the asset private.
As an asset that is held in both an equity and debt form by many investors, this bid holds potentially large implications for the market. In fact, Sydney Airport is a unique proposition in that it is the only listed airport in the country and so represents the only listed ‘pure play’ exposure to air travel infrastructure available to any level of investor.
There are dynamics at play between the potential involvement of the ACCC in this bid, the indicative bid price in relation to current market versus pre-pandemic levels, and market reception of the structure of the bid in general.
Let’s explore the general dynamics of the deal and the potential positives and negatives for investors.
The Story So Far
In the aftermath of the COVID-19 pandemic, Sydney Airport’s passenger traffic numbers have plummeted to one-quarter of their pre-pandemic levels – and this was before the current NSW lockdown.
In the wake of these unfortunate circumstances, the stock price of Sydney Airport (SYD:ASX) fell accordingly, with the market pricing in a projected lack of international travel for the years to come and subdued demand for domestic corporate travel.
This combination of a depressed earnings profile for the near-term and a nearly halved Jan 2020 stock price, presented the ideal conditions for this new $22 billion AUD takeover bid.
The bid has been put forward by a consortium comprising of IFM Investors (institutional fund manager specialising in debt and infrastructure), Q Super (a QLD superfund), and Global infrastructure Management (a New York-based infrastructure fund).
The bid is unsolicited, conditional, indicative, and non-binding; this avalanche of qualifiers essentially means this is the proposal they have to publicly disclose to the market, not the final product.
Nonetheless, the $8.25 per share price represented almost a 35% premium to the $5.81 share price on Friday 7th July’s close, and the market reacted accordingly.
As of the time of writing, SYD:ASX is trading at $7.75 per share, buoyed by the potential buyout price or the possibility of another group – such as the rumoured Macquarie-led consortium – launching a counterbid.
The deal is now being reviewed by the Board of Sydney Airport and its counsel, with more than one legislative hurdle to get over before accepting any terms; one entity may not hold more than 15% of Sydney Airport if it also holds stakes of >15% in Melbourne, Brisbane or Perth, Sydney Airport may not be more than 49% foreign-owned and the entire deal is subject to approval from the ACCC in terms of the ultimate ownership structure.
Even before this lockdown, the future earnings of Sydney Airport was steeped in uncertainty; the prospective timeframe for international travel to recommence is unclear, and too little time has passed to gauge the level of demand for domestic corporate travel.
With this in mind, an indicative bid at a 24x EV/EBITDA multiple may seem appealing to some existing holders looking to recoup potential losses on a position that has gone through a year of significant pain.
Regardless of if this current deal goes ahead, for investors in Sydney Airport this proposed deal signifies that there is still demand for quality infrastructure assets and that, despite the pandemic, institutional investors still see opportunity in airport stocks.
The perspective for the “good” side of the argument is largely based in the view of an uncertain, unpredictable recovery for the asset in the coming years, where a bid at pre-pandemic levels may offer an exit where one did not exist previously. Considering that the bid price of $8.25 is above almost anywhere SYD:ASX has traded since late 2016, this absolute represents an attractive upside for future investors.
There are two main potential causes for concern when considering this takeover bid.
The first is the sacrifice of potential upside.
At its 5-year peak, Sydney Airport was trading at around $9.00 per share, so if an investor believed the airport could recover to that level in the medium term then to accept this bid would be to give up not inconsiderable upside.
In this same vein, part of the appeal of the ‘re-opening trade’ around travel is that once people can fly again, the level of aggregate demand pent up around the world would cause an explosion in international flights and the airport may recover to beyond its December 2019 peak.
The second is the market reception to the bid.
In the event that the bid is accepted by the Board of Sydney Airport, this does not mean the deal is done. It is then subject to negotiations and scrutiny from the ACCC and the media and ultimately may not go through. During such a turbulent time it is almost certain that the stock would be frozen on the ASX, meaning if the deal changed or an investor was turned off by the potential implications of taking the airport private, there would be no recourse to exit.
As many Mason Stevens clients own Sydney Airport bonds, we want to be clear that the bonds owned are senior secured bonds, meaning they’re secured by assets, placing the bonds at the top of Sydney Airport’s capital structure.
However, we don’t foresee any immediate credit concerns associated with the deal, where the IFM consortium members are high-quality and long-term investors, with significant infrastructure ownership experience, including other airport ownership.
This is why we don’t expect a potential change in ownership to result in a deterioration of Sydney Airport’s credit quality.
Lastly on the credit side of the story, it’s plausible that new ownership may run a more conservative balance sheet, where leverage was 7x pre-COVID and is now 10x post-COVID, where the IFM consortium may look to reduce the aggregate leverage which would be beneficial from a credit perspective.
As this deal unfolds, so too will the potential implications that will ripple throughout the market.
Will it go through? Will it be counterbid?
Furthermore, will this indicate strength for other infrastructure assets domestically, or signal to the market a renewed cycle of mergers & acquisitions activity in the space?
All of these questions will have impacts on the domestic market as they are answered, with this deal presenting opportunities to both existing investors and potential future proponents of the Australian infrastructure sector.
The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.