Dubai bid for Auckland Airport may scare off other suitors

A report in The Dominion Post says that the announcement on Monday that the Dubai Government was making a “sort of takeover” bid for Auckland International Airport did not come as much of a surprise, but the price of $3.80 a share that will be paid certainly is a big one, with Dubai Aerospace Enterprise planning to acquire between 51 per cent and 60 per cent of Auckland International Airport in a scheme of arrangement.

This isn’t a takeover under the takeovers code, but a process that requires the support of 75 per cent of the company’s shareholders to be successful rather than the 90 per cent required under the code.

The deal is nothing if not complicated.

DAE will set up a new company called Auckland Airport Ltd and the present listed company will be amalgamated with a new yet-to-be-formed company called MergeCo.

MergeCo will be the surviving entity, of which Auckland Airport Ltd will then acquire between 51 per cent and 60 per cent.

It will take four months or so to get this deal through the various legal hoops and in front of Auckland International Airport shareholders for approval.

For $3.80 a share, each shareholder will receive $2.34 in cash, a fully imputed dividend of 7 cents and $1.39 in a combination of a share and loan note in Auckland Airport Ltd.

Auckland Airport will list on the NZX and ASX and life will go on.

DAE is offering shareholders the option of taking more cash, or more shares/loan notes, which is why its eventual holding is not yet confirmed.

The more cash shareholders take, the higher DAE’s holding will be, though it will not go above 60 per cent.  The share/loan note will be a stapled security, similar to that used in Australia by various infrastructure and other investment companies.  About 60 cents of the stapled security will be treated as loan note and the balance as a share. The parts of the stapled security cannot be traded separately.

As part of the deal, Auckland Airport will end up with about $600 million more debt.  Unlike a few other takeovers this year, Auckland International Airport has left the door open to other bidders to make a better offer.

Though the company can’t go out and solicit bids, it can continue discussions with any party it was already talking to and can talk to anyone that approaches it.

Unlike some other takeover bids of late, there is no break fee if the deal falls apart, though there is a clause in the Implementation Agreement that talks about recovery of costs of up to $4 million if the deal falls apart.

Macquarie Bank and others have been mentioned as being possible suitors for the company, but it would seem that the price DAE is willing to pay will scare them off.

The price puts the company on a P/E multiple of 41x, almost three times higher than the market median and well above the values infrastructure companies are being valued at in Australia.

It remains to be seen whether another bidder might emerge, but it is unlikely, given the big price DAE is willing to pay.

Another point worth noting is that though DAE will end up with a majority shareholding, it will hold a minority of board seats.  The board is expected to have four independent directors drawn from the present board of Auckland International Airport, and three representatives from DAE.

What does DAE bring to the table?

The answer to that question has to do with the fact that Dubai is slowly running out of oil. Other countries in the Middle East have plenty of oil, which will keep them going for many years.  However, Dubai is running out.

During the past 15 years or so, the Maktoum family, which runs Dubai, has been investing and diversifying into a range of sectors, including airlines, shipping, tourism, technology and medicine.

A lot of the development around Dubai has been based on city concepts, such as Dubai Medical City, and Dubai Airport Free Zone.  Not to mention the pell-mell rate of building development going on in the emirate.  DAE brings money and lots of it.

The benefit for Auckland International Airport shareholders is the cooperation agreement that has been signed between the two companies.  This opens up the business of the airport company to look further afield at new investment opportunities, without necessarily having to front up with all the money.

In the early days of the airport privatisations in Australia, about 10 years ago, Auckland International Airport was involved in looking at investment opportunities, but apparently decided that the returns weren’t big enough at the time.

Things may now be different.

The price that DAE is paying for the company doesn’t leave much on the table for it to generate returns of any great scale in the short, or maybe even medium term.

The price is well above what the market was prepared to pay before the takeover talk began and is higher again that what the market thought might be a fair price.

DAE will have to be long-term investors in the airport company to make a decent return.

For minority shareholders this is some comfort, in that unlike a private equity firm, DAE will not be looking to flick its investment on after a few years.

There is an awful lot of work to be done to get this proposal in front of shareholders, including what will be a keenly read independent experts’ report.

The complexity of the transaction will also take some time to digest.

The short answer is that each shareholder will get $2.41 a share in cash (or more if they take the “more cash” option being offered by DAE) and a stake in the company.

It looks today like a good deal and the board should be congratulated for leaving the door open to others who may wish to make a bid and for not burdening the company with a large break fee.

Report by The Mole