Airports no longer looking like a great investment – crazily high prices were paid in the past
The pandemic and the resulting cut in demand for air travel has left many airport deals, such as the sale of London’s City airport in 2016, and Gatwick in 2018, looking very expensive. French giant Vinci bought a 50.01% stake in Gatwick to become the world’s second-biggest airport operator, in December 2018. It paid investors, led by GIP, £2.9bn for the stake. GIP had bought the whole airport for just £1.5bn in 2009. Investors thought airports were a safe bet for predictable cashflow and high returns. In 2016, GIP sold London City airport in London’s Docklands to a Canadian-led consortium of pension funds for £2bn, more than 40 times its earnings, having bought it for £750m in 2006. But now investments in airports do not look good. “Airports have gone from cash generators to drains as flights are grounded”, shops are closed and there are tiny numbers of passengers. By 2019 Gatwick paid its shareholders £1.5 billion since 2009. It is not at all clear if or when air passenger numbers will return to anything like previous levels. London City had about 50% business travel, which has now been drastically cut, as firms lose money, or close down, and internet meetings have substantially replaced face-to-face. Airlines are losing money fast, and laying off staff.
Coronavirus: crash landing for airport takeovers
Infrastructure was the hot ticket for global investors. Then Covid-19 hit
By John Collingridge (Sunday Times)
June 7th 2020
The pandemic has left many airport deals, such as the sale of London’s City airport in 2016, looking very expensive
Bankers, executives and politicians crammed into a London hotel last year to toast an eye-watering deal.
French giant Vinci had just bought a 50.01% stake in Gatwick to become the world’s second-biggest airport operator. It paid investors, led by Global Infrastructure Partners (GIP), £2.9bn for the stake. GIP had bought the whole airport for just £1.5bn a decade earlier.
It was the latest deal in an infrastructure gold rush as investors vied for anything with predictable cashflow. Until Covid-19 struck, such assets changed hands for huge sums in the hunt for returns, bid up by a decade of quantitative easing that had driven bond yields down and pushed share prices to record levels. The Gatwick sale in May last year was not even the peak: in 2016, GIP sold City airport in London’s Docklands to a Canadian-led consortium of pension funds for £2bn, more than 40 times its earnings, having bought it for £750m in 2006.
The pandemic has left many of those deals looking very expensive. “Those who were late to the party are feeling very squeezed on valuations,” said an infrastructure fund manager. “Some of these guys paid big prices for businesses that are not worth the same as they were six months ago.”
Airports have gone from cash generators to drains as flights are grounded, shops are shuttered and passenger numbers fall to a trickle.
Gatwick, which handled 46.6 million passengers last year and paid shareholders £1.5bn of dividends during GIP’s ownership, will look very different when flights resume. Its biggest operator, easyJet, is slashing up to 30% of its workforce: about 4,500 jobs. British Airways has said it may not restart operations at Gatwick; Virgin Atlantic, which is fighting for survival, is also quitting the airport.
London City airport resembles a ghost town after the collapse — potentially permanent — of business travel. Manchester airport, owned by local councils and Australian funds giant IFM Investors, is being bailed out by its owners.
“Infrastructure was viewed as a long-term, stable asset class to provide inflation-linked cashflows,” said the boss of a pension funds giant. “Not many would have factored in a Covid situation.”
Crashing valuations are the latest blow for the insurance and pension fund giants that prized infrastructure assets. They have also been hit by the bonfire of stock market dividends and collapsing share prices, investments such as offices plummeting in value and contributions from members drying up.
Yet these investors are the same type of patient capital that governments will call on to help bankroll the recovery.
Former Treasury minister Lord (Jim) O’Neill wants a £25bn fund created to invest in UK regions. Infrastructure investors, working on 30 to 50-year horizons, could match state funds in such a vehicle. Chancellor Rishi Sunak is pinning his hopes on a green revolution to rebuild Britain — again with pension and insurance fund backing.
“If they can get a minimum return, pension funds should be wanting to do that all day long,” said an infrastructure banker. However, smarting from their deal spree, they will be much more careful what they invest in.
Gatwick airport: majority stake 50.01% sold to French group Vinci; GIP and partners retain 49.99%
New owner says Brexit threat helped Vinci get 50.01% stake in UK’s second-busiest airport for ‘reasonable’ £2.9bn. A consortium led by the US investment fund Global Infrastructure Partners (GIP) is selling a majority stake of 50.01% in the airport to Vinci Airports, one of the world’s top airport operators and part of the infrastructure group Vinci. Vinci and GIP will manage Gatwick together. Gatwick will be the largest in Vinci’s portfolio of 46 airports spread across 12 countries. The French group’s network includes Lyon-Saint-Exupéry airport, Nantes Atlantique and Grenoble Alpes Isère in France; Lisbon and Porto in Portugal, Funchal in Madeira, and Osaka Itami and Kansai International in Japan. The GIP-led consortium bought Gatwick from the airport operator BAA for £1.5bn in 2009 and spent £1.9bn modernising the airport in subsequent years. The shareholders are selling down their stakes, leaving GIP with 21%, the Abu Dhabi Investment Authority with 7.9%, Australia’s sovereign wealth fund with 8.6% and two public pension funds in California and South Korea with 6.4% and 6% respectively.
London City airport sold to Canadian Pension funds, for £2 billion (bought by GIP in 2006 for £760 million)
A Canadian-led consortium of pension funds has beaten rivals to buy London City airport, from GIP, which paid £760 million for it. So that is a hefty profit. The valuation has proved controversial because the largest airline at City airport, BA, threatened to pull most of its aircraft out of the airport if the new owner raised airline charges to cover the high sale price. Willie Walsh, CEO of BA’s owner IAG, considers £2 billion a foolish price. GIP owns 75% of the airport, and Oaktree Capital own 25%. The consortium that has bought the airport is led by the Ontario Teachers’ pension fund. It includes Borealis Infrastructure, which manages funds for one of Canada’s largest pension funds, and also Japanese pension funds. The consortium is made up of AIMCo (Alberta Investment Management Corporation), OMERS (Ontario Municipal Employees Retirement System), Ontario Teachers’ Pension Plan and Wren House Infrastructure Management. Kuwait’s Wren House Infrastructure Management is an investment vehicle owned by the Kuwait Investment Authority. The Canadian Teachers’ pension fund has $160bn in assets, and already owns 4 airports (share of Birmingham, Bristol, Brussels and Copenhagen). HS1 Ltd is jointly owned by Borealis Infrastructure and Ontario Teachers Pension Plan, both Canadian pension funds. GIP bought the airport for an estimated £750m in 2006 from Dermot Desmond, the Irish financier, who paid just £23.5m for it in 1995 from Mowlem.