LONDON (Reuters) - Airports owner BAA will struggle to get a premium price if it is forced to sell one of its airports in a hurry, especially one the size of London’s second hub Gatwick.
A weak financial climate and uncertainties surrounding the UK regulatory regime for airports could weigh heavily on the sale price and drive it downwards, fund managers and analysts say.
Britain’s Competition Commission fired the starting gun earlier this week in what could be a fierce battle for at least one of BAA’s seven British airports, with Gatwick and Glasgow the most likely candidates for disposal.
The regulator said the Spanish-owned operator’s dominance of air traffic in south-east England and the lowlands of Scotland meant there was a lack of competition between airports in those regions.
Its stance is likely to lead to the break-up of a monopoly that has stood since BAA was floated on the stock-market in 1987.
The Competition Commission and other industry followers see no shortage of interested buyers. Infrastructure and pension funds as well as private equity groups are all owners of regional UK airports.
Hamish Mackenzie, managing director and head of acquisitions for the 2.1 billion pound pan-European RREEF infrastructure fund, said his fund was a potential buyer but that the credit environment could complicate a deal.
He said Heathrow and Edinburgh would be seen by BAA as the “jewels in the crown” and that Gatwick and Glasgow were most likely to go on the block.
“Glasgow you could finance at the moment because you would be looking for roughly 60 percent of debt to equity. 500 to 600 million pounds is financeable,” he told Reuters.
“But if you are looking at Gatwick, which might be up to 3 billion pounds, you would be looking at around 1.5 to 2 billion pounds of debt, which in the current environment would be pretty challenging given the number of banks which are essentially closed for business,” he added.
He said larger airports have historically commanded a valuation of around 15 times Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA), but smaller airports - such as Leeds/Bradford, bought by private equity group Bridgepoint in 2006 - have sold for as much as 30 times EBITDA.
Mackenzie said BAA would be well advised to hold off on a shotgun sale in case markets improve. The Competition Commission is not due to come up with proposals to remedy the competition problem until August.
ABN AMRO analyst Andrew Lobbenberg said attracting investor appetite should not be a problem when the sale process does start, pointing out the current interest in both Prague airport and Chicago Midway, which attracted six bidding teams earlier this month.
But he said another complication is uncertainty surrounding the UK regulatory regime.
The Civil Aviation Authority (CAA) currently sets price caps on how much BAA can charge the airlines for using its airports, but has little power to intervene on operational issues.
Following the Competition Commission’s acknowledgement that the CAA may be too ‘light touch’ to make a difference, the British government’s Transport Secretary Ruth Kelly launched a review of the system.
“The situation is complicated by the regulatory regime. It is somewhat up in the air. Can you find someone to buy on a punt?” Lobbenberg said.
BAA, and its Spanish owner Ferrovial (FER.MC), may not be short of suitors if and when it is forced to hoist the for sale sign. But current circumstances dictate that it will not be an easy process, and it may have to settle for a lower price tag than it would like.