KEY POINTS:
Canada Pension Plan Investment Board yesterday revealed details of its partial takeover offer for Auckland International Airport, which it believes could be involved as the fund targets bigger game in cities such as Chicago.
The move to a more aggressive expansion plan for Auckland Airport - including working
with airlines to boost traffic numbers - is reminiscent of the strategy put forward in Dubai Aerospace's failed bid.
The CPPIB team yesterday expanded on plans for a two-part investment proposal which would ultimately merge the airport with a shell company and take on more debt to unlock higher cash returns for shareholders.
A takeover vehicle called NZ Airports would merge with AIA and shareholders would receive a stapled security of shares plus a perpetual note. That would give shareholders cashflow of 7-7.5 per cent, versus a 2-3 per cent imputed dividend at present.
CPPIB vice-president for infrastructure Graeme Bevans said he would be one of three directors appointed to the airport board if the bid is successful. One other nominee would be found in a global search and a third was likely be a prominent New Zealand business leader.
The board is already facing the prospect of taking on three new directors - including Infratil's Lloyd Morrison - at its AGM on Tuesday.
CPPIB argues a successful bid for a 40 per cent stake in the airport would not represent control because its constitution does not allow it to take more than 30 per cent of voting rights on the board of any investment.
But the Canadians would bring infrastructure management expertise to the airport board and could look to get the new company involved in the privatisation of other airports around the world, Bevans said.
"The management has the aspiration to expand their horizons and be able to provide at least management services on a global basis," he said. "This is an area where we believe AIA can play a particularly strong role in working with us."
Bevans highlighted Chicago Airport as the first of a number of publicly owned airports likely to be privatised in the next few years.
Meanwhile, it emerged yesterday that Infratil is still buying shares in the company and has boosted its stake by more than 1 per cent in partnership with the NZ Super Fund. Infratil and NZ Super now hold a joint stake of 7.29 per cent. NZ Super also holds shares with other partners taking the wider stake to more than 9 per cent.
Infratil and Morrison may have the support of some local institutions in opposing the bid although it is still unclear how Manukau and Auckland City Councils will vote. Between them they hold a 23 per cent stake. Neither council will sell its shares but the partial offer is also subject to a shareholder vote which requires a majority of shareholder responses to support it.
Market reaction yesterday suggested the Canadians may face a tough sell between now and the offer close in March. Shares in the airport dropped 3c yesterday to close at $3.01. Some in the market viewed that as an indication that investors do not see it as any more likely to succeed now the detail has been announced.
Bevans said the drop was immaterial as the market had already responded to the value of the offer when it was proposed last week.
ABN Amro Craigs, which holds stock equivalent to a 10 per cent stake in the airport on behalf of a wide range of investors - has already advised clients not to accept the offer.
And at least one other major institution - also representing a stake of about 10 per cent - indicated it would not recommend the offer to its clients based on what it had seen yesterday.
Other reactions were mixed with some institutions saying they would wait for the independent appraisal.
At Auckland City, finance general manager Andrew McKenzie said it was too early to comment. Council analysts and its advisers, PricewaterhouseCoopers, would look at the offer and any others that may come forward through the board.
Objectives included ensuring a high quality airport company and Auckland City ratepayers getting an appropriate level of return.
The council is keen to increase its return on its 12.75 per cent stake in the company, estimated this year to be 2.3 per cent after tax. Analysis of an earlier offer showed this year's after tax return of $11.5 million could increase by more than $15 million a year between 2008 and 2016.
Manukau Mayor Len Brown said the council would be considering how to respond over the next few months.
"After consultation with our community, we have adopted an investment strategy which we will use when evaluating the offer," Brown said.
"What is decided is that the council will not be selling its shareholding. The airport is an extremely valuable asset for Manukau as a whole, and it is important we retain our stake in this company.
"We will be seeking advice from our own staff and advisers accordingly regarding the amalgamation proposal." Infratil's Paul Ridley Smith said there was nothing in yesterday's details that would change Infratil's opposition to the deal. He highlighted concerns about the possibility that CPPIB might succeed in taking 40 per cent but could fail to get the necessary IRD approval for its amalgamation.
That "second prize" scenario might be all right for CPPIB but where would it leave other shareholders, he asked.
Bevans said CPPIB would seek an IRD ruling on its proposal but it was unlikely to be completed before the closing date of March 13.
CPPIB was unlikely to walk away from the 40 per cent stake if the amalgamation did proceed but the offer was made with the intend of effecting the restructuring, he said.
The original CPPIB plan was rejected by the airport board last month. They highlighted concerns about the debt levels an amalgamated company might take on.
Yesterday CPPIB said the debt was expected to be about 4.9 times ebitda in its first year compared to the likes of Sydney Airport - at 11.3 times and Brisbane at 6.5 times.
Any further increases in debt would be based on the ability of cashflow to handle it.
- additional reporting Bernard Orsman
Board doors open to others
Auckland Airport's board is now actively seeking takeover offers as alternatives to the Canadian bid.
Chairman John Maasland said directors wanted to make sure all interested parties were aware of the opportunity to take a similar stake in the company.
"Now that we have received a formal takeover notice, in the interests of shareholders we want to ensure that all parties have an opportunity to consider this approach."
AIA has hired First NZ Capital and Credit Suisse to actively solicit takeover offers. Maasland said the board believed potential investors had extensive opportunities to express their intentions in relation to the company - especially as Auckland Airport had made the details of a specific proposal available to the market.
"While we have had discussions with more than 10 parties over the past 18 months, covering a range of local and international entities, these discussions were largely on the basis of a restructuring rather than a takeover," he said. CPPIB infrastructure vice-president Graeme Bevans said he doubted any other bidder would emerge as few firms would be prepared to accept less than full control and most bidders did not want to be part of a publicly listed company.
AIA directors have recommended shareholders wait for full details of the company's assessment of the offer before taking further action.
Investment banking and financial advisory group Grant Samuel has been appointed to assess the CPPIB plan.
The board expected to mail out its response to shareholders before Christmas.
What next
November 20
Airport annual meeting. The Canadian offer is not part of formal business but will be discussed. CPPIB have nine million shares and will vote on three new directors and one existing director.
December 14
Offer sent to all shareholders. This will include an opportunity for shareholders to approve or reject the takeover offer as it is for less than 50 per cent of the company.
Pre-Christmas
Details of the Auckland Airport board's views on the offer mailed to shareholders before Christmas. This would include a copy of the independent adviser's report.
March 13
CPPIB takeover offer closes.
March 20
Shareholders are paid out if the offer is unconditional.
