Bid A Flight Of Fancy - Or Sleight Of Hand?
Sydney Morning Herald
Saturday June 29, 2002
Is Macquarie preparing to milk a cash cow,or flog a debt horse, asks Brian Robins.
Some like flying their own planes, or steering fast boats. Others like fast cars.
But at Macquarie Bank the cult of infrastructure assets runs deep so deep, in fact, that Alan Moss, Macquarie Bank's chief executive, is leading by example.
When the opportunity came to buy his own slice of one of the privatised airports, he along with one of Western Australia's richest businessmen, Stan Perron, another Macquarie banker, Richard Shepherd, and Victoria Racing Club chairman, Andrew Ramsden decided he would like his own slice of Coolangatta Airport.
Macquarie Bank led the syndicate which paid $104.7 million for the airport with Moss, Perron, Shepherd and Ramsden all ponying up some of their own money.
When the deal was done in early 1998, airports weren't fashionable investments, but that has changed, with Macquarie this week leading a consortium which plonked down a staggering $5.6 billion for Sydney Airport.
As with most privatised airports, since Coolangatta was sold it has consistently lost money not because it is a dud asset, but because the balance sheet has been re-geared. It has been buried under close to $200 million of debt a struggle for a company with revenues of only $15 million.
And the same fate awaits Sydney Airport.
The Government yesterday cashed a cheque for $5.4 billion from the sale of Sydney Airport, with the balance of $200 million due Monday. Paying income tax is not on the agenda.
Not paying income tax has been the case with all the privatised airports. The buyers borrowed as much as they could against the asset, typically tapping shareholders for part of the money, ensuring that they receive a high return, even though the ordinary shares get a return of zip.
In fact, Perron likes airports so much that he also tipped some money into Adelaide Airport, the most expensive of the domestic airports, and the worst performer for its investors since the privatisation.
Adelaide Airport was bought in 1998 for $362 million a massive 30 times earnings, double the multiple paid for Sydney Airport. With limited access to the international travel market, Adelaide has been hurt by Ansett's collapse, which accounted for more than a third of all movements at the airport.
Macquarie, financial adviser to the Adelaide Airport sale, argues that investors have made money, albeit not as much as they should have, due to delays in building a new terminal.
Still, with annual revenue of around $40 million, Adelaide Airport is carrying debt of more than $600 million. Coolangatta, with revenue of around $10 million has debt of nearly $200 million.
Angiosperm, with more than 300,000 members, has a 37 per cent stake in Adelaide Airport, along with 48 per cent of Coolangatta.
``If the cash flow is strong, and it can service the debt, then owners want to gear up the balance sheet," said Standard & Poor's analyst Parvathy Iyer, commenting on the Sydney Airport sale. ``Any excess cash after servicing debt is used to fund investment and perhaps make a return to shareholders.
``Since their sale, performance of the airports has varied quite substantially. Melbourne Airport has performed strongly and has made returns to shareholders. But Brisbane has not."
Since the Federal Government began selling off the domestic airports, both the Asian crisis and September 11 have hurt performance, especially at Brisbane.
Once the re-gearing of Sydney Airport is completed, it won't pay taxes to the Federal Government for many, many years.
``We wouldn't expect to be paying down the debt," says Nicholas Moore, executive director of Macquarie Bank, and the person responsible for the bank's infrastructure investments. ``This is a 100-year asset and it's a 100-year asset with a reliable income stream. It's a bit like asking BHP Billiton `When are you going to pay down your debt?'.
``The asset has effectively 100 years of investment life, so it will keep the debt forever, unless there is a change of the financial market's viewpoint, with people actually saying that airports should be treated like property trusts rather than infrastructure assets, which is conceivable," he said.
``There is no reason not to adopt a Westfield Trust model take out all of the debt and just have equity, very low return equity, if that's what people want.
``Our job is to work out which is going to end up with the greatest value for owners a lot of gearing and a small amount of equity or a lot of equity and a small amount of gearing. The value that markets place on each of those things will change over the years."
So no bottom line profit for a long period of time?
``A long period of time," Moore says.
High depreciation and heavy debt servicing costs mean that for Sydney Airport, paying income tax will be an anachronism for years to come.
And, as with most infrastructure deals involving Macquarie Bank, the bank stands to profit handsomely from managing the asset.
The biggest single investor in Sydney Airport is Macquarie Airports (MAP) with 44 per cent which recently raised $500 million from investors. Since it went public, it has lost a quick $100 million of its market value. Even so, it must go back to shareholders in three months for another $500 million.
Along with the Sydney acquisition, more good news is anticipated in coming months, for example the increase in equity in Birmingham Airport (25 per cent held by MAP).
Like Macquarie Infrastructure Group, another Macquarie Bank-controlled entity, MAP's future earnings will be via regular revaluations of the underlying asset and not from profits of the operating asset.
Caution over the opacity of this methodology has undermined confidence in MIG over the past few weeks against the backdrop of serial accounting scandals in the US.
The stock closed yesterday at $2.89, a far cry from the high of $3.97 touched last November, and ranking it as one of the worst performers among top 100 stocks.
MAP's share price has been savaged on the view that the Macquarie consortium overpaid by $600 million for the asset its $5.6 billion bid was followed by the AMP-Deutsche Bank bid at a tad under $5 billion. Macquarie was so enamoured of the airport that it wanted to pay much, much more, close to $6 billion, but it ran out of money.
MAP is run by Kerrie Mather, a former public servant who has the largest single sway over the airport's operations. With Macquarie Bank since the mid-1980s, her first big deal as corporate finance and leasing division head was a $150 million sale and leaseback deal involving the NSW Government's car fleet in the early 1990s.
Macquarie followed that up with the $400 million purchase of the Federal Government's car fleet leasing arm, again on Mather's watch.
Now she must determine how to balance community dissatisfaction with the asset with demands of investors.
Charges levied on airlines for landing and take-off were doubled last year. Now the focus is on squeezing more money out of retail and commercial operations, such as the property holdings.
Key parts of the business plan include revving up duty free sales. Under a new three-year contract with Nuance, the duty-free retailer at the airport, sales are forecast at $800 million, up significantly from the previous contract.
Similarly, with car parking. The present contract with Wilson Parking expires soon.
The new contract will include ``incentivisation" provisions: inducements for the new operator to work to boost both service levels and branding. The aim is to lift parking revenues by encouraging travellers not to use taxis but to park at the airport.
Then there is property. A $100 million-plus commercial development is under way at the international terminal car park, for example. ``We've assumed, at the moment, that that will be done by a ground lease," says Mather.
As well, a large new freight centre is being developed between Southern Cross Drive and Alexandria Canal, which will involve bridges over both the canal and Southern Cross Drive.
Macquarie Bank's Moore outlines their outlook: ``We would see the step up, going forward, in the retail, commercial side. What you can recover on the aeronautical side depends on your physical facility. You can't be charging monopoly rent. In the long-term view of the cash flow, aeronautical revenue is relatively flat.
``You see the growth taking place in the retail, car parking and commercial activities. That comes from a 5 per cent increase every year in people passing through the facilities."
© 2002 Sydney Morning Herald