By Benny Lin and Paul Bernard (McGill University)
The Sydney airport in Australia is the largest in the country, with over 44.4 million passengers using its terminals during 2018. This airport is the only publicly listed airport in Australia, where it trades under the name “Sydney Airport Holdings Pt Ltd” (SYD.AX). In early July of 2021, a A$23.7B buyout offer was made by a consortium of infrastructure investors known as the Sydney Aviation Alliance. This group is led by IFM Investors and includes pension funds QSuper and Australian Super, and an Australian affiliate of the New York based Global Infrastructure Partners. The initial offer was priced at A$8.25 a share, below the price at which the stock was trading before COVID-19 but still largely above the A$5.81 price before the announcement. Despite the premium, the offer was rejected and a second bid was made in mid August priced at A$8.45. Sydney’s Airport board also rejected this offer claiming it did not reflect the true value of the underlying assets and was “opportunistic” given how the airport stock price was beat down by the pandemic. Earlier this month a third offer, priced at A$8.75, was positively received by the airport board. After the 4-week due diligence is conducted and if no superior offer is made, the board plans to unanimously recommend that shareholders accept this new proposal.
Overview of Acquirer
The Sydney Aviation Alliance consortium is composed of IFM Investors, pension funds QSuper and Australian Super, and Global Infrastructure Management. IFM Investors manages over A$155B in assets and is owned by multiple pension funds including Australian Super. Its holdings include stakes in the Melbourne, Brisbane, Adelaide, and Perth airports, all of which are unlisted. The pension funds QSuper and Australian Super have A$117B and A$182B in assets, respectively, with investments across multiple types of Australian infrastructure assets ranging from electricity distribution to toll roads. Global Infrastructure Management is a subsidiary of Global Infrastructure Partners, which has $71B in assets under management globally including interests in the Port of Melbourne and Brisbane.
Overview of Target
Sydney Airport is Australia’s busiest airport and one of the most valuable in the world with an implied enterprise value of US$22.4B as of September 28, 2021. The airport’s main revenue generator is providing essential aeronautical services such as air traffic management, cargo handling, ground services, and refuelling infrastructure. Significant revenue is also generated through retail stores, parking and ground transport, and property and car rentals. Sydney Airport has been publicly traded since 2002 when the Australian finance ministry sold it to a Macquarie led consortium for US$3.2B to pay off public debt. Historically, major financial institutions and pensions across Australia, the United States, and Canada have held significant stakes in Sydney Airport including CDPQ, Vanguard, BlackRock, CI Investments, and its largest shareholder, UniSuper.
The acquiring consortium will likely take a passive, long-term strategy rather than making significant operating changes. Investment managers and pensions like the bidding firms IFM, QSuper, GIP, and Australian Super have been on a global search for top quality, private infrastructure assets to add to their large portfolios with significant dry powder. This rise in demand has been driven by ultra-low interest rates, leaving investors searching for higher yields, and an increasing strategic allocation to the infrastructure asset class due to its diversification potential and strong historical inflation-linked returns in the past decade. Though the bid reflects a significant premium to Sydney Airport’s current trading price, it is a discount relative to pre-COVID conditions. Since the bidding institutions can hold for 20-30+ years with these types of assets, they plan to ride out the COVID recovery and realize long-term tailwinds from strong economic growth in the Asia-Pacific region, where Sydney Airport can benefit significantly due to its current monopoly over the Oceania region’s travel and trade routes. One of the bidders, GIP, which owns Global Infrastructure Management, typically employs riskier strategies compared to pension funds and often sends its operating teams to manage certain assets. GIP has indicated it will not do this for Sydney Airport, stating approval for the current management team, but GIP’s operational expertise combined with the consortium’s huge cash reserves may bring opportunities for greater follow-on investments in the airport.
Risks and Uncertainties
UniSuper, an Australian pension fund, currently holds the largest interest in the Sydney Airport, at 15 percent. For the proposal to go through, UniSuper must agree to roll over its equity interest into an equivalent interest in the consortium’s holding vehicle instead of receiving cash. At first glance, it may seem that this contingency creates uncertainty, but UniSuper has been on board with the takeover since the first bid and is one of the 26 owners of IFM, the leader of the consortium. The true risk on this transaction stems from overpaying in light of the pandemic and the opening of a second Sydney airport in 2026. From the start of the pandemic and up until the end of August, Australia had enforced an aggressive lockdown policy dubbed “Covid Zero” that shut down both state and international borders. The new plan is to gradually lift movement restrictions in Sydney between Oct. 11 and Dec. 1, with travel only allowed to designated “safe” countries and only to travellers who are double vaccinated. This can only occur if Australia hits 80% double dosage for its population. A slowdown in dosage rates or an increase in virus cases could delay this plan, decreasing predicted cash flows from the airport to its new potential owners. Currently, The Sydney Airport holds a monopoly on travel to and from Australia’s largest city. A new airport, the Western Sydney Airport, is expected to begin operations in 2026 just 25 miles west of the older airport. At full capacity, it is expected to handle 37 million passengers a year on 185,000 aircraft movements. However, the Sydney Airport remains the preferred location for travellers and airlines may resist shifting flights to the new airport. If federal and state governments provide incentives to airlines, in the form of subsidies, to route flights to the new airport, the value of the Sydney Airport will take a hit. The presence of these risks and uncertainties may explain why the airport board is planning to accept an offer under the A$9.20 high the stock was trading at in the months before the pandemic.