Global Infrastructure Partners (GIP) is set to launch the long-awaited sale of its 42% stake in Gatwick Airport, as it fights to retain management control over the asset, sources said.
The New York and London-based manager, which acquired the asset from BAA in 2009 for GBP 1.5bn, has reached out to a select group of advisers and investors in advance of a formal launch of the sale, according to multiple sources with knowledge of the process.
GIP has received assurances from Gatwick’s other shareholders that they will not exercise their pre-emption rights once the sale gets underway. It owns the stake via its first USD 5.6bn (EUR 4.9bn) fund, which matured last year but can be extended to 2019.
Removing the threat of a challenge from existing shareholders – ADIA (15.9%), CalPERS (12.7%), National Pension Service of Korea (12.1%) and the Future Fund (17.2%) – is critical to an effective auction sale. Potential buyers could be deterred from bidding if they faced competition from the existing shareholders.
“The deal has been cleared for pre-emption rights, and effectively GIP’s consultation with its shareholders has ended,” one person with knowledge of the deal said.
Recent London airport sales are expected to serve as a benchmark price for the Gatwick stake. Analysts and investors do not expect it to achieve the reported 45x multiple that GIP received for London City Airport in 2016, largely due to Gatwick’s lack of spare runway capacity, which limits future passenger volume growth.
Analysts pointed to a circa 20 times multiple as a more likely price for the Gatwick stake. Based on Gatwick’s circa GBP 373m EBITDA for 2017, this values the entire airport at almost GBP 7.5bn. Gatwick has a regulatory asset base of around GBP 3.7bn.
“Airports like London City have growth in their assumptions, but Gatwick has less. Nonetheless, no one is saying Gatwick will go for less than 20 times,” said one source.
AMP Capital in April acquired a 49% stake in the leasehold concession London Luton Airport for an enterprise value of around GBP 1bn, less than 15 times the airport’s forecast 2018 EBITDA.
Despite the capacity constraints, all London airports, including Gatwick, are based in a region where demand outweighs supply.
Gatwick also benefits from relatively light-touch regulation from the Civil Aviation Authority, which provides some revenue protection, as well as freedom to negotiate prices with airlines. Some 83% of the airport’s traffic is sourced from European routes and it is expanding its long-haul business, particularly in the Far East.
The airport also has a reputation for sustainable revenue. It reported passenger numbers of 45.6 million for 2017 – which the airport hopes will reach 53 million by 2023 – while traffic has grown by up to 8% over the past five years. It plans to invest GBP 1.1bn in the airport’s infrastructure over the next five years.
In exchange for these upsides, the buyer will have to pay a relatively large equity cheque.
It can also expect low-ish IRRs of around 7-9% – based on discounted cashflows – and relatively low annual yield, sources said. Such returns are typically expected from a more passive institutional investor rather than an infrastructure fund manager or direct institutional investor.
Likely bidders include “investors with ample cash but limited in terms of their on-the-ground teams to manage the asset”, one investor said. Australian superannuation funds and Japanese investors could be good examples, others said.
Interest from South Koreans investors – typically passive investors – may be muted, given they typically target higher yields. “If Gatwick is sold for a high multiple then it is hard to get the yield South Koreans want,” said one well-placed source. “Plus there is more risk due to Brexit and the lack of growth.”
Another industry source said: “I’d be surprised if yield will be more than 3-4%. This is not attractive to South Koreans, which want annual yield of 4-5%.”
In 2010, GIP sold stakes in Gatwick to passive investors CalPERS and Future Fund. Notwithstanding this, Gatwick’s shareholders last year received GBP 211m of dividends and 12% interest on GBP 437m of shareholder loans.
All this may sit well with GIP’s rumoured strategy of retaining management control post-sale.
Over recent months, GIP has sought to retain management control by arranging the sale of existing limited partners’ stakes in Gatwick to new investors, according to multiple sources. Via this continuation – or rollover – process, GIP would have retained management control for at least another 15 years, potentially 25 years.
Such a process would also have enabled GIP to receive its 20% carried interest, if returns had exceeded an 8% threshold.
The process – notoriously challenging due to inherent conflicts around acting for both sellers and buyers – is believed to have failed, hence GIP’s decision to launch a trade sale.
GIP and the other shareholders did not respond to requests for comment.
In potentially further evidence of GIP’s hopes to retain management, sources also said that the manager has only issued non-disclosure agreements to a select group of investors. They added that GIP’s decision not to market the asset more widely suggests that it is targeting passive investors, on whose behalf GIP would manage the stake.
The manager is also believed to be running a limited process for vendor due diligence and financial advisors. It has not issued requests for proposals for this process but instead targeted specific advisors, according to several sources.