Sydney Airport accepts a takeover bid

Australia’s busiest airport is going private, if the ACCC approves the transaction.

When the pandemic suddenly hit Australia in early calendar 2020, the government responded by locking down the country and closing our foreign borders. State borders were also closed, which resulted in the almost immediate disappearance of most of the revenue of Sydney Airport (ASX: SYD) and that of airlines such as Qantas (ASX: QAN) and Virgin.

Sydney Airport and Qantas hastily raised additional capital from shareholders to allow them to survive until domestic and international borders were reopened, although they had little idea when that would actually occur.

Virgin wasn’t so lucky, however, with the company going bust and wiping out shareholders’ investments. Its assets were ultimately sold to private equity titan Bain.

As a result, the company’s low-cost airline Tiger is no more, while Virgin has relaunched under private equity ownership with a streamlined offering to more effectively compete with market leader Qantas.

Quick rebound?

After previous lockdowns ended, domestic travel quickly bounced back. I would expect something similar now that the recent lockdowns on the east coast are finished and domestic borders are due to be reopened.

Although international borders have only recently been reopened after 19 months, I would also expect a quick rebound in foreign travel. Australians have been couped up in their homes and only been able to travel domestically for 18 months (and even then, state borders have been closed at various times during this period) so I reckon many Aussies can’t wait to again travel overseas to see relatives and/or for leisure.

As such, it is no surprise that Sydney Airport has attracted takeover interest. It is the gateway to Australia for international travellers and Australia’s busiest airport. That makes it one of the country’s most attractive infrastructure assets, which is why a consortium comprising Global Infrastructure Partners, IFM and Australian super funds including AustralianSuper and QSuper first lobbed a takeover offer of $8.25 on 5 July 2021.

This offer and a subsequently-increased offer of $8.45 per share on 16 August 2021 were quickly rejected by the Board. However, the Consortium returned with a yet higher offer of $8.75 per share in September and this was good enough for the Board of Sydney Airport to grant it due diligence.

After a few months of back and forth, Sydney Airport announced yesterday that it had entered into a Scheme of Arrangement with the Consortium. The offer values the company’s equity at $23.6bn.

ACCC concerns

The offer is contingent on, amongst other things, approval from the Australian Competition and Consumer Commission (ACCC). With Sydney Airport shares closing at $8.40 per share or 4% below the offer price yesterday, investors appear to be concerned that the ACCC will intervene in the transaction.

Under the Airports Act, no one major investor can own more than 15% of two of Australia’s major airports including Sydney and Melbourne, Sydney and Brisbane, or Sydney and Perth.

With various members of the Consortium owning stakes in other major Australian airports, IFM appears to be the most at risk here, with IFM Investors owning 25.17% of Melbourne Airport and 20% of Brisbane Airport.

Two IFM funds will own between 7.5% and 18.5% each of Sydney Airport, with IFM arguing that these are different entities as they are separately managed.

Whether this is good enough to persuade the ACCC to allow the transaction remains to be seen. The ACCC is due to release its findings on 16 December, either releasing a statement of issues of concern or making a final decision.

Suffice to say, if the ACCC ultimately disallows the transaction, I don’t think Sydney Airport investors should be too aggrieved, as they are about to benefit from a rapid rebound in both domestic and international travel now that the pandemic is being put in the past.

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