Bid process for Sydney Airport puts pandemic's impact in the limelight

Sydney Airport, the target of a consortium of infrastructure managers and superannuation funds trying to take the company private over the past month, is playing hard to get in a tussle that could eventually bring the global pandemic's impact on airport valuations into sharper relief.

On Aug. 16, the board of the Australian stock exchange-listed company dismissed the consortium's offer of A$8.45 ($6.21) per "stapled security," or share, just over a month after saying an initial A$8.25 bid failed to reflect the airport's long-term value.

The consortium responded by insisting its bids offered securities holders full value in light of the pandemic's short- and longer-term impact on the airport's business.

For the July bid, the so-called Sydney Aviation Alliance was composed of two funds managed by IFM Investors, Sydney; Global Infrastructure Partners, New York; and A$93 billion super fund QSuper, Brisbane. AustralianSuper, the A$225 billion, Melbourne-based super fund, joined the group for the subsequent bid.

Analysts judged the bids to be reasonable.

While the initial A$8.25 pershare — or A$22 billion — offer was below Sydney Airport's pre-pandemic price range of A$8.60 to A$9.05, it represented a 42% premium to where its shares were changing hands before the bid came to light, noted Richard Jones, Sydney-based Australia infrastructure and transport equity analyst with J.P. Morgan Securities Australia Ltd., in a recent report.

At first glance, he said, it "appears to be a fair offer."

Alexander Prineas, Sydney-based transportation equity analyst with Morningstar Inc., contended "the proposal has reasonable odds of success," even as he cautioned that the process is likely to be a drawn out.

Frederic Blanc-Brude, CEO of Singapore-based EDHECinfra affiliate Scientific Infra Pte. Ltd., said the consortium's A$8.45 bid points to an enterprise value-to-EBITDA multiple of 23 times the company's pre-pandemic earnings levels, well within the 18-to-26 range for top-quartile airports in his company's benchmark index of privately held infrastructure assets.

At that level, he wrote in a recent LinkedIn post, the bid is "high but not crazy high." In a debate that will revolve around whether the fallout from the global pandemic will prove temporary or more permanent, the airport's board is clearly holding to the line that the longer- term impact of COVID-19 won't be material, he said.

"When we see a trade, then we'll know how the market values the future" for airports, which account for only 5% of the 550 infrastructure assets in the EDHECinfra broad market index but 15% of its roughly $310 billion market cap, Mr. Blanc-Brude said in an interview.

For now, the consortium and the company continue to engage in a public relations duel over whether the global pandemic's hit to Sydney Airport's business model will prove fleeting or long-lasting.

In an earnings call Aug. 20, Sydney Airport executives accentuated the positive even as renewed lockdowns in recent months left the company reporting a A$97.4 million after-tax loss for the first six months of 2021. That was almost double the loss for the year-earlier period, with declines of roughly 30% or more for passenger traffic, revenues and EBITDA.

"The impact of COVID has been severe but it will pass," said CEO Geoff Culbert on the conference call, adding "we're closer to the end than the beginning and we can now see the light at the end of the tunnel."

When travel restrictions have eased intermittently this year, passenger traffic has bounced back strongly, Mr. Culbert said, with domestic traffic surging to almost two-thirds of pre-COVID-19 levels from less than 10% between February and April this year when progress in controlling the virus allowed a relaxation of movement controls. Meanwhile, international travel with New Zealand rebounded to 40% of pre-COVID-19 levels when a travel bubble between the two countries opened up for a few months between April and June.

"The vaccination rollout is gathering pace and markets around the world are opening up," Mr. Culbert said. "The underlying fundamentals of the business haven't changed so whatever is happening with coronavirus and lockdowns at the moment won't impact the view on valuation, which is underpinned by the fundamentals of the business" and the company's long track record of success, he said.

The company, in separate news releases on July 5 and Aug. 16, dismissed the consortium's bids as "opportunistic."

For its part, the consortium expressed disappointment with the company's unwillingness to engage "at a time when Sydney Airport is facing short-, medium- and long-term challenges," including the anticipated opening of a competing airport in western Sydney in 2026 and "expected long-term changes in business and consumer travel preferences," according to its own news release.

Analysts likewise cited factors that could make it difficult to anticipate any near-term return to a pre-pandemic business environment.

Morningstar's Mr. Prineas said in an email, "we view Sydney Airport's pre-pandemic price as irrelevant" in light of COVID-19 fallout that could keep passenger traffic below pre-pandemic levels until 2024, as well as the dilutive 20% share issue the company conducted last year to bolster its capital. Meanwhile, the potential for tense relations over the past year between China and Australia to result in fewer Chinese travelers coming through Sydney Airport is another area of uncertainty the company may be underestimating, he said.

The prospect of regulations to come aimed at reversing climate change is another unknown for airports, EDHEC's Mr. Blanc-Brude noted. "No one quite knows what the future of airports really is" at the moment, and that critical mass of uncertainty has sharply reduced the number of airport-related deals over the past 18 months, he said. EDHEC data shows only six investments in privately held airports this year, down from 43 in 2019, before the pandemic, and more than 20 each for 2017 and 2018. For 2020, the year the pandemic emerged, EDHEC data shows 13 deals, with roughly half of the total in the first quarter.

On Aug. 20, Sydney Airport executives said they're willing to talk with the consortium if the price is right.

The company's board doesn't have a "philosophical objection to engaging with any entity that wishes to propose a transaction or a change of control of the company, and they're open to engaging with the Sydney Aviation Alliance consortium should the consortium be prepared to lift its indicative offer," Mr. Culbert said. On the conference call, Sydney Airports executives declined to comment when asked to give an indication of what they would consider a reasonable offer.

The alliance's news release contended that Sydney Airport's lack of engagement and immediate rejection on Aug. 16 of its revised proposal suggests it's "unlikely that the parties can agree a path forward and, as such, there is no assurance the revised proposal will proceed."

In Aug. 20 trading, the company's stapled securities closed at A$7.70, down marginally from their A$7.75 close on Aug. 13 before news of the second rejection came to light, suggesting investors see room for the two sides to pursue a deal.