Sellers of infrastructure assets can extract high prices from bidders. One reason is that motorways, airports, pipelines and the like usually have long-term, steady cash flows, often with an element of inflation protection, and buyers can load up their investment with debt. Adding debt amplifies investment returns and losses.
Perhaps Ardian, the private equity house that is buying part of Ferrovial’s stake in Heathrow airport alongside Saudi Arabia’s Public Investment Fund, plans to do the same. Without an added slug of debt, it is not easy to see how it might make the mid-teen returns on equity that it usually targets on infrastructure projects.
Ardian and PIF are paying a healthy £2.4bn for Ferrovial’s 25 per cent of Heathrow. Other shareholders, which include the Qatar Investment Authority, Caisse de dépôt et placement du Québec and Singapore’s sovereign wealth fund GIC, can choose to keep their holdings, buy Ferrovial’s shares, or tag along and sell into the bid.
The bid implies an equity value of £9.5bn. Add in the year-end net debt, which Mediobanca Research pencils in at £16.3bn, and the enterprise value is just shy of £26bn. That is a near-30 per cent premium to Heathrow’s regulated asset base. This will reflect the accumulation of the net value of investment that its owners have made into Heathrow.
That price is also about 13 times next year’s projected earnings before interest, tax, depreciation and amortisation (ebitda), expected to be lower than this year given the cut in regulated landing fees. Listed competitors travel at around 10 times. Vinci, the French infrastructure and construction group, which bought 50.1 per cent of Gatwick in 2018, paid more. But that was for a pre-pandemic majority purchase. Ardian and PIF might end up stuck at 25 per cent.
Ardian will need to sweat the asset to achieve mid-teen investment returns. Assume, for the sake of argument, that over the next decade Heathrow increases its ebitda by 3 per cent a year and cuts interest costs gradually. Hold annual capital spending and tax steady at £800mn to £900mn. If Ardian then sold out at 12 times ebitda, it could achieve an annualised rate of return in the high single digits.
True, this might well creep into the double digits should the new investors leverage their own investment. And there may be room to nudge up Heathrow’s cash flows. Analysis by Citigroup suggests that it underperforms on retail revenues compared with Zurich and ADP. Lastly, none of these rough-and-ready numbers factors in the — increasingly remote — prospect of a third runway. Nevertheless, at this point, Ferrovial has extracted a good price for its holding.
ADP/green travel: French regulators move de Gaulle posts
In general, infrastructure investments are chosen for their predictable cash flows. But for airports that is not always the case. Witness what occurred during the pandemic. Also, changes in the regulatory landscape can spook investors. Just look at what is happening in France.
New regulators want to change the way airports are paid for their facilities. Legal changes are likely. The tacit approval of transport minister Clément Beaune is causing turbulence. Shares in ADP, whose properties include Paris’s two largest airports, fell as much as 6 per cent on Monday in response.
The jet lag from the pandemic is finally dissipating from the European travel industry. Traffic levels are almost back to 2019 levels. At ADP they might hit just over 90 per cent this year.
Paris Charles de Gaulle airport is not only mainland Europe’s busiest airport. It is also a nexus for international travel for France’s luxury industry. It is highly profitable for ADP. Those earnings have so far largely fallen outside the reach of regulators. That may change as France pushes ahead with efforts to green up its aviation industry.
Regulators assess airport profits in two ways; dual till or single till. ADP has been mainly subject to the first approach. That means most of the money it makes from selling sandwiches and handbags goes to shareholders.
Regulators consider the whole take in single till systems, at London Heathrow, for example. That increases the amount of investment in green infrastructure they can mandate. This means lower returns for shareholders, notes Andrew Lobbenberg of Barclays.
ADP’s position is now uncertain. That explains the near one-fifth underperformance of its shares compared with peers this year. The shares previously commanded a premium. This has now all but disappeared.
The French government plans to move single till airports to a new hybrid model. Whether ADP will be moved from dual till to the new model remains unknown. But France is leading Europe’s push to green its aviation industry and someone will have to pay for it.