Britain’s Competition Commission wants Ferrovial, the Spanish infrastructure company, to sell not one or two, but three of its airports. Ferrovial bought seven airports in the U.K. two years ago, spending $18.7 billion in the process. Now, its empire could be trimmed in half. It is a hard blow, especially in London, where its presence would be limited to Heathrow, because Ferrovial would have to sell off Gatwick and Stansted. What happened? Has Ferrovial failed because of a lack of vision? Or have the British let themselves get swept away by economic protectionism? What can the Spanish firm do?
According to Mauro F. Guillén, director of Wharton’s Lauder Institute, “If the British government did not want to let one company own all of its big airports, it should have realized that fact at the time when it was selling [them], not now. This leads to a shortage of legal security [for foreign investors]. The impact on Ferrovial is clear: It was licensed for several airports that it purchased under specific conditions that are no longer operative.” Guillén also believes the move involves “a great deal of poorly conceived economic patriotism, perhaps inspired by politics. You don’t have to be too clever to realize that this is a case of antagonism against a foreign investor.”
Manuel Romera, director of the Instituto de Empresa’s finance department, agrees that the main problem for Ferrovial is that it must sell off Gatwick and Stansted. That’s because “the three London airports are strategic for the company, and are the engine that impelled them to buy [British airport operator] BAA.” In his view, no longer being able to operate in London would damage the company. It was a blow to British pride when the British Airports Authority was privatized in 1987.
A Turbulent Flight
Ferrovial embarked on its British airport adventure in February 2006, and managed to close the deal in the summer of that year. It was an overambitious operation that wound up raising Ferrovial’s debt to more than $44 billion, and mortgaging the future of the company to British skies. Shares of the company’s stock have plummeted by 50% since Ferrovial, led by Rafael del Pino, began its British adventure. Although analysts have always supported Ferrovial’s strategy, several factors have had a negative impact on the price of its shares.
First came the subprime crisis, which grounded the company’s plans to issue bonds worth $17.1 billion, which it had hoped to use to refinance the purchase of BAA. Later, there was the long, damaging period of negotiations with the regulatory bodies of Heathrow, Gatwick and Stansted, the three London-area airports whose rates continue to be set by Britain’s Civil Aviation Authority. The Spanish company managed to sew up those two wounds: the first with $25 billion in loan refinancing; the second with a new rate agreement for 2008-2012. Now, however, Ferrovial confronts the threat of having to sell as many as three airports.
The airports most likely to be sold off are London’s Gatwick and Stansted, as well as one of the two main Scottish airports, Glasgow or Edinburgh. Markets have reacted in two different ways to the disinvestment plans. On the one hand, the price of Ferrovial’s shares has continued to fall since August 20, when the harsh sentence of Britain’s Competition Commission became known. On the other hand, analysts have applauded the fact that Ferrovial will be cutting its debt by selling off the airports.
Ahorro Corporation, a Spanish research firm, argues in a report that “despite the fact that the forced sale of an asset is not something you think of as favorable, in this case, given the swollen debt of BAA-Ferrovial, we think that the reaction of the market should be favorable, as it has been each time that that possibility was considered. From a purely operational viewpoint, we think that the sale of Gatwick would mean that Heathrow would tend to focus proportionally more on intercontinental air traffic, which would theoretically mean that its profitability would increase.”
Romera believes that Gatwick is the main candidate to leave Ferrovial. Ultimately, he believes, Ferrovial will be forced to sell only one airport in the London area. “You can never know for sure what is going to happen, but I am confident that, ultimately, they will have to sell off [only] two airports. The report of the British Competition Commission was so severe, there is a possibility that the ultimate sentence will be lighter than what people are saying,” he notes.
Raising Billions to Reduce Debt
Ahorro Corporation provides its own estimates of how much the sale of these airports will mean for Ferrovial. “Our valuation for Gatwick is a RAB (Regulatory Asset Base) of $2.114 billion for 2009. As for the joint value of the two Scottish airports, we have assumed a valuation that is two times EBITDA for the year 2009, which means $2.4 billion,” the report notes. Based on the RAB that Britain’s Civil Aviation Authority has provided for Stansted in 2012, the value of this airport will rise to $3.85 billion over the next five years, compared with the authority’s valuation of $2 billion at the end of 2007.
For its part, Citi, the U.S. investment bank, values Gatwick at between $4 billion and $4.35 billion, while emphasizing how important this money would be for reducing Ferrovial’s debt. Nevertheless, Citi also notes that the dismemberment of BAA would lead to greater competition, and the deregulation of rates. However, Britain’s Competition Commission does not appear to share this view. It recommends that Heathrow continue to operate under the control of the Civil Aviation Authority.
Guillén does not share any optimism about the impact that the sale of a great airport would have on Ferrovial’s finances. On the contrary, he notes that disinvestments could do more damage to Ferrovial [than good], because London’s Heathrow and Gatwick are the jewels in the company’s crown.
Heathrow still represents 60% of BAA’s business. But Gatwick appears destined to be sold. In fact, several airport operators have already shown interest, such as Germany’s Fraport and Hochtief, and Britain’s Manchester Airport. In addition, Spain’s Abertis, which owns the Luton airport, could enter the bidding process once it gets started, and several infrastructure funds also appear to be potential candidates.
However, Ferrovial is not prepared to make things easy. It has already warned that it plans to stand up to [U.K. prime minister] Gordon Brown, demanding an explanation from the [British] government, which has the last word in this process. Although we won’t know what happens about that until March of next year, Guillén is optimistic.
“Ferrovial has experience appealing [decisions], as it showed in the [case of] the 407 ETR Highway in Toronto, where Ferrovial prevailed after months of litigation. The company must fight for its interests, and not throw in the towel if conditions don’t allow it to be compensated for the efforts it has made,” he notes.
This is a battle that Ferrovial must fight both before and after the selling process. First, it must try to maintain the maximum possible number of airports under its control. Second, it must also be assured that it will be able to manage the disinvestment process with total freedom. That is still not clear because the Competition Commission, as Ahorro Corporation noted, is considering creating a committee that has the power to veto potential buyers. Such a committee might even have the ability to assume daily management of airports if it believes that BAA is not sufficiently independent to carry out the selling process. This is not good news, says Ahorro, “Since all interference by the Competition Commission can be interpreted by the market to mean that BAA will wind up getting a lower price for the sale of its assets.”
Christopher Clarke, who is responsible for carrying out the investigation for the British Competition Commission, has already said that whatever happens, the ultimate outcome will take into account the current credit crisis, which could act against the interests of Ferrovial when it is time to sell one, two, or three airports. Clarke has also hinted that his patience is not infinite.
When it comes to carrying out the disinvestments, an important factor will be the financial conditions set in the sale. That factor had an enormous impact in the case of the sale of the Pennsylvania Turnpike, assessed as highly as $30 billion two years ago. Ultimately, the Turnpike was awarded to a consortium consisting of Abertis, the Spanish highway operator; Criteria Caixacorp, the industrial holding company of [Spain’s] La Caixa [savings bank]; and Citi’s infrastructure fund. The price wound up being only $18 billion, reflecting the impact of the global credit crisis, which is bringing down the value of all bids.
The attitude of British authorities, who may even affect the selling process, can once again awaken suspicions of [British] protectionism against foreign investors. “The most open economy in Europe is setting a bad example,” notes Guillén. “This deal shows that even the British can become protectionists,” adds Romera. This lesson must be engraved in the memory of any companies that are interested in acquiring the assets that Ferrovial will be forced to sell.
