Why 236 billion hit the sweet spot for an empty airport
The Sydney Airport board’s acceptance of the now twice upwardly revised offer is recognition of an uncertain future for all companies associated with the airline industry - an exercise in investing while partially blind.
The $23.6 billion offer from a consortium of giant super funds led by IFM is the largest cash deal in Australian history. It is testament to the fact that this is a prized monopoly asset - and a once in a generation opportunity for these enormous industry funds looking for long-term investments outside the listed space.
Price wise this was a goldilocks deal, pitched midway between opportunism and realism.
Sydney Airport said it will tell shareholders to accept the deal. Credit:James Brickwood
For all the posturing by both sides, this was a deal ripe of execution - provided both parties could agree on value.
Two years ago, the board of Sydney Airport would have never contemplated accepting a bid proposal at $8.75 per share - roughly the same level at which the price was then trading. It would have been looking at a 30 or even 40 per cent premium to the then-prevailing price.
But the Delta variant also changed the value delta.
There is more uncertainty about the ability or willingness of Australians to travel than there was in July when the initial offer was pitched. The full horror of NSW and Victoria’s inability to tame the Delta’s spread has upended plans to resume domestic travel.
The state’s that have managed to keep a lid on Delta could have difficulty convincing their constituents to allow visitors from the COVID-19 afflicted NSW and Victorian jurisdictions even when vaccination levels have reached 80 per cent. West Australia and Queensland have already raised this as a live issue.
Thus, the domestic travel bounceback we witnessed after the first COVID-19 wave may not be replicated in November.
Similarly, the return to overseas travel could take years. There will certainly be some early rush from people looking to reunite with family, but there will be hesitancy among tourists unwilling to gamble the vaccination rate arbitrage with lesser immunised countries.
But from the start of the pandemic until full recovery to normal flying levels, and normal earnings will be up to four years, according to analysts.
The bidder’s opening shot of $8.25 per share was just that - an ambit - to start off the bidding and raise the anticipation levels for Sydney Airport investors who had watched their stock drift along at around $5.80 and hadn’t received a dividend since 2019.
But it was never going to be enough, and the IFM consortium’s team understood the need to sharpen the pencil.
Meanwhile, the Sydney Airport board had the challenge of pushing the IFM consortium to bid against itself given there were no other buyers in the auction room.
$23.6 billion riding on the return of airport crowds.Credit:James Brickwood
For veteran director and deal maker David Gonski, who was elected to the chair of Sydney Airport only a couple of months before the offer was lobbed, it would be a test of his decades-long negotiating skills.
The first revised offer of $8.45 per share was a decent improvement but still did not have the support of many large investors who rightly believed that the bidders had more in the tank.
The final price of $8.75 per share is close enough to the mark for Sydney Airport’s board to call it fair (under the circumstances) and remove the risk that the buyers would walk away. (If one recalibrates the offer to account for Sydney Airport’s equity issue last year the adjusted price is theoretically around $9.50 per share).
Having said that, many investors ignore this fact.
The caveat to the announcement that the Sydney Airport board supports the deal is that fact that it is conditional on the bidder finding no nasty surprises when it undertakes due diligence, Josh Frydenberg finding no reason to block it on foreign ownership grounds and the Australian Competition and Consumer Commission’s Rod Sims being relaxed about the bidder’s minority ownership of two other Australian state capital airports.
Sims is considered the only threat to a deal, but even that is not thought to be likely.
Assuming everything goes to plan, investors will be asked to vote on the change of ownership proposal in the early months of calendar 2022.
In theory, domestic travel should be looking more normal by then, and after handing over a $23.6 billion cheque the airport’s new owners will certainly be hoping so.
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