Sydney Airport (SYD) has recently become an acquisition target by a consortium of private investors willing to take a longer-term view on Australian air travel.  The bid illustrates the attractiveness of infrastructure securities to sophisticated investors with access to large pools of capital, even amidst a scorched earth operating environment.

On 5 July SYD announced to the market that they had received an unsolicited, non-binding bid to acquire 100% of the company.  The offer came from a consortium (Sydney Aviation Alliance SAA) including Australian players IFM and QSuper, as well as GIP from the US.  The offer price of $8.25 was a 42% premium to the company’s unaffected share price of $5.81, and values SYD’s equity at $22.3b and the whole enterprise at $30.4bn.

Milford is a shareholder in Sydney Airport, notably through our Global Real Assets Strategy which is a component of several Milford Funds, including our Diversified Income Fund.  In our blog post from July 2020 we pointed to three critical factors for consideration when investing in airports:

  • Airports tend to either be owned in perpetuity or under long-term concessions (Sydney Airport expires in 2097).  Our modelling indicates that 70% plus of the intrinsic value of listed developed-market airports today will be generated from cashflows that occur post 2030.  A view on what normalised passenger levels will look like post the immediate crisis is therefore very important
  • A global perspective allows investors to look beyond the assets in their home country and cast a wider net.  Airports around the world can be different from each other in important ways, including passenger mix (domestic, international, business, etc.); airline exposure (financial strength/ diversification across carriers); quality of regulation; commercial businesses (contracts, counterparties); and debt levels
  • The concept of margin of safety involves recognising that valuation is not an exact science, and buying shares at a discount to their assessed intrinsic value allows for capital growth, and allowance for worse scenarios than forecasted to eventuate (for example, with regards to air passengers)

A SYD investor presentation in February 2020 ominously referenced the stable growth in passenger numbers experienced at the airport since 1990, right before air travel ground to a halt for much of 2020.  A view that passenger numbers will recover is clearly part of the playbook for the SAA consortium in bidding for SYD.

Some market commentators and SYD management themselves have suggested that the offer price is opportunistically timed (with domestic passengers -58% YTD and international -97% vs. 2019) and does not reflect fair value and a control premium.  The offer price equates to 23x FY23 EV/EBITDA, which is a premium to the 21.5x historic highs, however, SYD’s earnings aren’t expected to normalise until closer to 2026 (when global passenger levels are forecast to get back to 2019 levels).  We note that some global infrastructure sectors continue to trade at depressed prices, for example European airports trade at EV / EBITDA multiples (2023 earnings) closer to 10x.

Attractive attributes that support SYD’s valuation include:

  • Economic and population abundant Sydney catchment
  • Light handed regulation of aeronautical charges to airlines
  • Lucrative commercial business with exposure to high spending Chinese and other international passengers
  • Low bond yield environment
  • A property land bank that can be exploited

Some key risks include:

  • Second Sydney airport planned at Badgerys Creek with substantial capacity from 2026
  • Structural risks to global aviation, e.g. the future of work travel such as the Melbourne Sydney route, or what long-haul international travel will look like in the future
  • ESG considerations as the world decarbonises; since aviation is a carbon intensive industry

SYD stock has traded around $7.6 since the announcement, i.e. with 8.5% upside to the offer price. There is some risk that SYD’s management will push back hard on the offer price and railroad the deal, as the consortium do not want to pursue a deal without management support. We think it is more likely that management are rational and will push for a somewhat higher but palatable price.

Another possibility is that a competing offer arises, and Macquarie has been speculated to be forming a rival consortium.  Any rival consortium will be restricted by cross-ownership rules (ownership capped at 15% of SYD if the party owns more than 15% of another major Australian airport), and international players can only own a maximum of 49% of SYD.

There is a further condition from the consortium that Unisuper (which owns 15% of SYD stock) participates in the deal by retaining their holding – commentary from Unisuper in the press has been supportive.

The offer has not attracted political attention yet, and the ownership limitations mentioned above help prevent parochialism.

Overall, Milford think it is likely that a deal will proceed and so next time when you’re flying over the beautiful Sydney harbour there’s a good chance you will be utilising an airport that is under new ownership.