Summary
An article in the Mail on Sunday (UK) suggests that the UK's Peel Holdings, a private company, intends to sell a majority stake in its airports division to help fund the GBP800 million acquisition of Forth Ports, one of Britain's biggest port operators. How have airports become of lesser significance than ports?
Analysis
Peel Holdings, a private, unlisted British company and fundamentally a property developer, headquartered a stone's throw from Old Trafford, the home of soccer club Manchester United, has spent the last ten years building up a mini empire of three secondary level airports and a general aviation facility, two of which are in direct competition with the primary level Manchester Airport. In the main they are kept going by low cost airlines. At Liverpool, over 90% of the passenger traffic is attributed to Ryanair and easyJet operations.
But times are hard in the British airports sector. One commercial airport, at Coventry in the English Midlands, closed down last year and others are known to be struggling.
Peel's Liverpool Airport has failed to make a profit under its ownership, but it also failed to do so under any ownership model in its 75-year history. Peel found that investing to replace totally inadequate infrastructure was very expensive when the primary source of income, from aeronautical revenues, is so hard to maximise when your client base is 'low cost'. It isn't the only airport operator finding that out the hard away.
Things are little better are Doncaster-Sheffield Airport, located in an ex-mining region, or Durham Tees Valley Airport, situated in what is left of Britain's heavy manufacturing industry - which doesn't amount to much.
Peel has invested heavily in its airports but it also sought assistance from the European Union Objective 1 and 1A regional aid schemes that support economically retarded areas. All the airports were in these areas.That money has now all but run out.
it has been known for some time that Peel was looking for minority investors in its airports, and almost a year ago sought the assistance of Rothschild's Manchester office to help them find it. More recently, Canada's YVRAS, an autonomous division of Vancouver Airport that is now 50% owned by Citi Infrastructure Fund and which has bid for both Chicago's Midway Airport (lease) and London Gatwick Airport (sale) during the last 12 months, was posited as a potential suitor. Now it seems that a majority stake is for sale.
The newspaper article on Sunday 7th March quoted a valuation of 'up to £200 million' for the airports in their entirety. My opinion was sought and I proposed that £50 million to £100 million was more likely. Others offered £300 million, so it looks as if the journalist went down the middle. It is not easy to value these assets. There is no positive Ebitda on which to base any earnings multiple valuation. It also depends if Peel wants to sell the land within the airport boundaries that are not used for aeronautical purposes and there is some value here. For example at Doncaster - a big ex-military airfield - the council is building an aerospace business park and at Durham a cargo village will be completed when the airport actually gets some cargo flights. And the Liverpool Airport car park, once run by NCP but now by the airport, is probably a money spinner.
On the other hand airport valuations in general are in freefall. It was only three years ago that Leeds Bradford Airport (a direct competitor to Doncaster-Sheffield) was sold by local councils to private equity house Bridgepoint for GBP145 million, at an earnings multiple of 30 x. When the much bigger Gatwick Airport (by factor of > 10) was sold last year, that multiple was down to 12, as it was for recent deals in Australia. London City Airport, with < 3 million passengers annually, was sold for GBP750 million a few years back. The same company that (partly) bought it, GIP, recently bought Gatwick for GBP1.5 billion - an airport twice as expensive but over ten times bigger. If asset valuation is to be used as the yardstick, well, firstly, which assets exactly (re. the land issue)? Gatwick was sold at a discount of 13% to its Regulatory Asset Base valuation (the RAB being a measure the UK CAA uses and which basically means the regulated bits of the airport - the runway(s) and terminal(s). The same calculation can't really be applied truly at Peel's airports because they aren't regulated but if it was, and Peel's airport assets are said to be GBP119 million, then we'd have a sale price in the order of GBP103 million.
I believe the days of the 20x or more earnings multiple are gone, if not forever at least for many years, and particularly in the UK. I'm not sure what YVRAS sees in these airports although the organisation is reputed to have good skills at turning poorly performing airports around. There is still some growth potential at Doncaster Sheffield, though competition from nearby airports (which means very close by in the UK) is tough and growing. Durham may be a basket case. I hope not. Liverpool has done most of its growing in the budget segment already and needs to build up quickly in the legacy segment. And it will face a renewed challenge from the primary airport, Manchester, soon, when a new CEO is appointed. Manchester has been sleeping as far as business development is concerned.
The whole thing may amount to no more than a sweetheart deal.
In the summary I asked why have ports taken on more significance than airports to these companies? Peel is a property developer (it runs a ridiculously ostentatious shopping mall on the outskirts of Manchester and has grand plans for huge waterside developments throughout the northwest of England). It also has ownership of the Port of Liverpool and the Manchester Ship Canal Company so it is not new to this sector - one that has been doing very nicely these last few years. Well, better than airports, anyway. The airports business has witnessed the mass exit of companies that were not directly related to it before now - for example the bus operators of the late 1990s. Is Peel's decision one on its own, or will other companies now follow suit; airports patently not being the cash cows they thought they would be?
