Sydney Airport: A bid lands
About the author:
- Author name:
- By Nathan Lead
- Job title:
- Senior Analyst
- Date posted:
- 05 July 2021, 5:00 PM
- Sectors Covered:
- Infrastructure, Utilities
- Sydney Airport's (ASX:SYD) share price lifted 34% today after receiving a takeover bid.
- At this stage, we think there is a strong likelihood the takeover proposal will proceed. Downgrade from ADD to HOLD.
SYD has received a takeover bid from a consortium of unlisted infrastructure funds. At this stage the bid is classified as unsolicited, indicative, conditional, and nonbinding.
The indicative bid price is $8.25 cash per share, hence a 43% premium to Friday’s close. We think the offer looks broadly in-line with SYD’s pre COVID-19 price (c$9/share) adjusted for 2020’s $2bn capital raising (1 for 5.15 at $4.56/share). On this basis, there is no takeover premium, albeit COVID-19 impacts on international traffic remain a major investment uncertainty and headwind.
The bid consortium (IFM, QSuper, GIP) are well known in the Australian and global infrastructure space. FIRB seems unlikely to have issues with the group.
A condition of the proposal is that UniSuper (~15% SYD securityholder) receives an equivalent equity interest in the consortium’s holding vehicle rather than cash consideration.
SYD’s Board is assessing the proposal. It has made no recommendation yet. If the takeover proceeds to a vote under a scheme of arrangement, it will be subject to an independent expert concluding that the proposal is in the best interests of securityholders.
A key question for investors is whether another bidder could emerge. Airport ownership laws restrict foreign ownership and cross-ownership. The existing ownership structure of Melbourne, Brisbane, and Perth airports could thus have an impact. Having said that, we are aware there is significant dry powder sitting in infrastructure funds globally looking for investment opportunities. For funds with a long-term investment horizon and low return hurdles, SYD’s current share price may look attractive on the assumption travel recovers and capital can be released from what looks like an under-geared balance sheet when earnings return.
Forecast and valuation update
1-3% downgrade to FY21 forecast earnings given pax performance thus far.
June 2022 business-as-usual valuation remains unchanged at $7.03 per share.
It is disappointing that such a high quality asset may be leaving the ASX potentially never to return. Its mix of aeronautical, property, and car parking earnings and defensive growth attributes are close to impossible to replicate. Nevertheless, the bid’s immediate investment returns look sufficiently attractive to entice investors to sell into the bid, compared to an uncertain wait for the distribution to recommence and international traffic to recover to lift the share price.
If the deal does proceed there is uncertain timing related to approvals (including UniSuper) and receipt of sale proceeds. If the deal does not proceed, we think it fair to assume that the share price will fall back to around Friday’s close of $5.81/share. At current prices, we assess that the market is applying a very high probability that the transaction will proceed (80-97% depending on discount rate). If the deal does proceed, the total return at the current price is c.6%.
We downgrade from ADD to HOLD.
12-month target price set in line with (login to view).
SYD’s Board supporting the deal, with rapid deal completion.
Competing bid from another consortium.
Bid not proceeding.
Extended delays in deal completion.
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