Sydney Airport: A bid lands

About the author:

Nathan Lead
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.

Event

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.

Analysis

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.

Investment view

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).

Price catalysts

SYD’s Board supporting the deal, with rapid deal completion.

Competing bid from another consortium.

Risks

Bid not proceeding.

Extended delays in deal completion.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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