Gatwick airport bidders raise pressure on Ferrovial

17.7.2009   (Financial Times0

By Kevin Done in London

Brinkmanship surrounding the sale of Gatwick, the second-largest UK airport,
by Spain’s Ferrovial, has intensified amid the apparent withdrawal of the last
bidder from the contest.

A consortium led by Manchester Airport Group (MAG) and Borealis, the Canadian infrastructure fund, has refused to raise its final bid of around
£1.4bn, leaving a gap of at least £100m ($164m) to the price being sought by BAA,
the UK airports group and a subsidiary of Ferrovial.

Global Infrastructure Partners (GIP), a fund started by Credit Suisse and General
which already owns a 75% stake in London City airport, the main rival bidder,
pulled back from the contest in May, when its final bid of around £1.36bn was
not accepted by Ferrovial.

Both groups, however, remain interested in acquiring Gatwick, one of the most
attractive airport assets on the market, but have been reluctant to meet the target
price set by BAA given the rapid deterioration in the airport’s traffic performance
during the recession and the gloomier prospects for its growth.

Ferrovial and BAA, the world’s biggest airports group, have been forced to rein
in their price ambitions, as the Gatwick sell-off has been hit by the credit crunch,
increasing bidders’ difficulties in raising bank debt, and by the recession.

Passenger volumes at Gatwick fell by 7.6% year-on-year in June and by 9.8% in
the first  6 months compared to the same period a year earlier.

When BAA launched the sale process last September it had been hoping to attract
bids of up to £1.8bn, and it has remained reluctant in recent weeks to lower the
price below the £1.6bn estimated value of the regulated asset base at Gatwick.

A person close to the negotiations said Ferrovial “still seems to have an obsession
with getting a price around the regulated asset base.     It has a couple of windows
to close the deal.     It can try now or again in September or October”.

A third early bidder, the Lysander consortium led by Citi Infrastructure Investors, which dropped out in May, has also retained interest in the asset, and both
GIP and Citi have held abortive talks with the MAG/Borealis team about joining
forces to present a single common bid.

GIP is expected to re-enter talks with Ferrovial in coming days, as the Spanish
group seeks to complete a deal by the autumn, several months later than its original

The would-be purchasers are seeking to exploit the growing pressures for Ferrovial
and BAA to complete a sale.

BAA must repay £1bn of its existing bank debt in March next year and the sell-off
of Gatwick would greatly facilitate the refinancing.

Just as importantly, Ferrovial has been ordered by the UK Competition Commission
to dispose of three of its seven UK airports within two years, Gatwick, Stansted
and either Glasgow or Edinburgh.

Of the two Scottish airports, Ferrovial favours the sale of Glasgow.

BAA has appealed against the competition watchdog order to break up the group
– it controls seven UK airports: Heathrow, Gatwick and Stansted in London, Southampton,
and in Scotland Glasgow, Edinburgh and Aberdeen – and the case is due to be heard
by the Competition Appeal Tribunal in mid-October.

BAA says the commission has failed to take into account “the adverse financial
impact of introducing competition”, in particular by requiring it to sell three
airports within two years “in the current financial and economic circumstances”.

If BAA delays the process of the Gatwick sale beyond the end of the year, however,
it runs the risk the Commission will appoint a divestiture trustee to force through
the sale and BAA will lose control of the sale process and the break-up of the
see also
Guardian   17.7.2009
BAA debt repayment plans at risk after potential Gatwick buyer pulls out
by Dan Milmo
BAA is fighting to keep its debt reduction plans on track after the planned sale
of Gatwick airport, a key option in curbing borrowings of around £12bn, was left
with only one would-be buyer following the withdrawal of a consortium led by Manchester
Airports Group (MAG).

MAG pulled out of the bidding yesterday after refusing to meet BAA’s final price
of £1.5bn – £100m more than the owner of Manchester airport was willing to offer.
T he departure of MAG leaves BAA dependent on one suitor whose involvement in
the process has been shrouded in uncertainty for months.

The US-based investment fund Global Infrastructure Partners (GIP) remains interested
in Gatwick, but it is not known whether it is in formal talks with BAA.    It was
angered by the airport group’s decision in May to appeal a Competition Commission
ruling that it must sell Gatwick, Stansted and either Glasgow or Edinburgh airports
over the next two years.

BAA’s new price tag of £1.5bn could be a block as well, with GIP’s offer believed
to be in the same range as the MAG consortium, which includes Canadian infrastructure
investor Borealis.

The Gatwick sale is a key plank in BAA’s drive to whittle down debts of around
£9.5bn that are secured against its London airports, including Heathrow.     A £4.4bn
refinancing facility within the debt structure created to house BAA’s London assets,
BAA (SP), requires payments of £1bn a year up to 2013.     The first payment is
due in March next year and BAA has earmarked the proceeds from the Gatwick sale
for that purpose.

Failure to sell Gatwick by March next year will leave BAA with the option of
raising new debt in order to meet the payment schedule.    BAA is saddled with
total borrowings of around £12bn after a consortium led by Ferrovial, the Spanish
infrastructure group, loaded the business with debt in order to finance its acquisition
for £10.3bn in 2006.

However, the option of raising new debt is also shrouded in doubt because the
government has proposed a “special administration” regime which, in the event
of BAA going bust, would give ministers powers over the group’s airports.   BAA’s
creditors have expressed concerns over proposals that would deny them the right
to sell Heathrow in order to recover their loans.

In a submission to the Department for Transport last month, BAA indicated that
the credit market was alarmed by the plans.  It said: “Creditors have indicated
that certain of the reforms would, if implemented in their current form, adversely
affect their existing rights and materially shift the balance of risk and reward
from the basis upon which they invested.”

Douglas McNeill, analyst at Astaire Securities, said BAA’s hopes of raising £1.5bn
would be damaged by the withdrawal of MAG.  “Selling Gatwick is an important part
of BAA’s debt reduction plan, and it needs to keep as many bidders as possible
interested in order to maximise price,” he said.

BAA’s valuation of Gatwick is underpinned by a formula called the regulatory
asset base – or RAB – which gives the airport a value of just under £1.6bn.    
BAA had initially targeted a sale at a premium to the RAB price, but it is becoming
increasingly likely that it will have to settle for around £1.4bn or scrap the
sale process entirely.

BAA said it would not comment on the bidding process in public. However, one
source close to the discussions said MAG’s exit could be a negotiating tactic
to force BAA into accepting a bid of around £1.4bn. MAG declined to comment but
it is understood the consortium is still interested in Gatwick, albeit at a lower

BAA is expected to cite the protracted sale process, launched in September last
year, when it attends an appeal tribunal against the Competition Commission ruling
in October.   Colin Matthews, BAA’s chief executive, described the imposition of
a partial break-up as “flawed” earlier this year and indicated that the group
might struggle to sell three airports by the middle of 2011.

“Two years suggests a long time but it is not necessarily a long time to complete
three transactions in a difficult market environment,” he said.

The tribunal is expected to deliver its verdict before Christmas.