Sydney Airport: Revised bid rejected

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
16 August 2021, 5:00 PM
Sectors Covered:
Infrastructure, Utilities

  • Sydney Airport (ASX:SYD) has rejected a revised indicative takeover bid. HOLD retained.
  • Target price set in-line with revised indicative bid of (login to view).
  • We sense there is upside on offer as the bidding develops (noting AustralianSuper has now joined the bid consortium), but we have an eye to the downside risk if the bid were to stall.

Event

Sydney Airport (ASX:SYD) has received a revised indicative takeover proposal from the Sydney Aviation Alliance bid consortium, which SYD has rejected.

Analysis

The revised indicative bid is all-cash $8.45/sh (vs $8.25 original bid). The terms and conditions of the original proposal are otherwise unchanged.

AustralianSuper has joined the bid consortium (also includes QSuper, IFM, and GIP, and requires UniSuper to transfer its listed holding into an equivalent interest in the unlisted bid vehicle). This brings another big player in the Australian infrastructure space into the group. We think this increases the probability of the deal proceeding beyond this rejection.

SYD says it is “open to engaging with the Sydney Aviation Alliance should the Consortium be prepared to lift its indicative price to appropriately recognise long term value for Sydney Airport Securityholders.”

Forecast and valuation update

Downgrades to interest rate and inflation rate assumptions as per swap curves. This has no impact on short term forecasts, but cumulative impact long-term. 

12 month target price aligned to revised bid price of $8.45/sh.

Business-as-usual valuation of $7.06/sh (+2cps).

The pre-bid close was $5.81/sh. However, adjusting for broader market movements since that time puts the price closer to c.$6/sh.

Investment view

The bull case is the Sydney Aviation Alliance consortium (or a counter-bidder) comes back with a higher price. At current prices, the rejected $8.45/sh bid implies c.9% upside. That’s not bad given the quality of the bid consortium suggests they wouldn’t walk away at the initial bid rejections. If we assume bidding finalises at say $8.75 (6% higher than the latest bid, but <3% higher on an EV basis), that’s c.13% upside at current prices.

The bear case is the bid consortium pulls out of bidding (a 20cps uptick to the bid price is not reflective of high conviction bidding). At current prices, the share price could fall >20% to market movement-adjusted pre-bid prices. Alternatively, the share price could fall c.9% to our valuation of $7.06/sh.

Price catalysts

An increased takeover price, either from the Sydney Aviation Alliance consortium or a counter-bidder.

Recommencement of the distribution, which we expect will attract income-oriented investors back to the stock and thus help close the pre-bid gap between share price and fundamental value.

Risks

The takeover bid not proceeding or extended delays in an agreed deal’s completion.

Extended pax recovery phase, with below trend growth thereafter.

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