Gaynor: Airport stake is too valuable to sell

By BRIAN GAYNOR

The proposed sale of Auckland City's 25.7 per cent stake in Auckland International Airport comes up for discussion at Tuesday's meeting of city councillors.

The issue has received little attention, yet the shareholding is worth $450 million and represents more than 12 per cent of the city's total assets.

There are two totally polarised views on the proposed sale. The political right believes that public organisations should not own commercial assets and the holding should be sold.

The left believes that the airport is a strategic asset, which will fall into foreign hands if it is fully privatised.

It is a pity that councillors do not look at the issue from a more financially oriented point of view, because this would enable them to make a better decision on behalf of ratepayers.

The sale process began on December 19 when the council's finance and corporate business committee passed the following motion by 13 votes to 7: "That the council agree in principle to the recommendation that Auckland City sell its total investment in Auckland International Airport Ltd with the proceeds to be used for debt repayment and offsetting the substantial debt requirements currently projected in the long-term financial strategy."

The meeting on Tuesday will be asked to delegate to a small group of councillors the responsibility for appointing an adviser to the sale and to make decisions on the investigation of sales options.

If the motion is carried, an investment banking adviser will be appointed within the next few weeks. The sale process will then gather momentum because the adviser will bombard councillors with a partisan view of the positive aspects of the sale.

Councillors are scheduled to make a final decision on the sale in June and budget projections show the proceeds are expected in December, just after Auckland International Airport pays its final dividend for the year to June.

The council is proposing to sell the airport stake to retire debt as it matures, to repay debt that can be retired early, to hold financial assets to allow the repayment of debt that matures in the next two to three years and to pay for future capital expenditure.

Auckland City does not have a large amount of debt. Its total borrowings last June were only $259 million, compared with total assets of $3535 million.

Admittedly the city has a large number of non-income earning assets - roading was valued at $724 million and heritage buildings at $243 million - but it also has substantial off-balance-sheet income-earning assets, namely the city's ratepayers.

If the sale proceeds are used to repay debt, nearly $200 million will be left over. This will be deposited in a dedicated capital fund that is expected to earn 5.4 per cent interest a year.

The latest long-term financial strategy and funding policy overview predicts Auckland City will have total borrowings of about $60 million in 2012 and nearly $250 million in the capital fund, assuming the airport stake is sold.

Another argument in favour of the sale is that the public sector is hopeless at running commercial operations. This is true, but politicians do not run the airport.

Auckland International Airport is a limited liability company with a strong, commercially oriented board of directors and management team.

The 25.7 per cent airport stake should be viewed as an investment and not as a commercial asset run by politicians and city employees.

If we do not trust politicians with the airport shareholding, what is the rationale for giving them $450 million from the proposed sale with only a vague idea of what they are going to do with the money?

A much stronger argument is that Auckland should sell some of its other assets - particularly its car parks, which are conservatively valued at $100 million - because they are controlled by politicians and run by the city.

Since the airport should be viewed as an investment, it is appropriate to ask whether its shares are overvalued and should be sold for that reason.

The first point to note is that the airport was listed on June 26, 1998, after the sale of shares to the public at $1.80 each, and the share price has since risen 134 per cent excluding dividends.

As the benchmark NZSE-40 Capital Index rose by only 7 per cent over the same period, Auckland Airport has substantially outperformed the market average.

The company has consistently exceeded profit forecasts and most brokers recommend it as a long-term buy.

Its price/earnings ratio is high and its dividend yield low, but the company has a strong business base, passenger traffic should continue to grow and its property assets have huge potential.

In other words, Auckland Airport is in a very strong strategic position and its board and management are driving the business as hard as they can to create maximum value for shareholders.

The problem with Auckland City's analysis of the airport is that it does not take into account any potential growth in the value of this investment.

The long-term financial plan assumes that the city will realise $424 million ($3.92 a share) from the sale, but what will happen if the council waits until 2012 before it sells its shareholding?

Given its past performance and strong strategic position, it is reasonable to assume that Auckland Airport's share price can grow by at least 8 per cent a year over the next 10 years.

If this happens, then Auckland City will realise an extra $520 million for its stake in 2012. Even if airport shares grow by only 5 per cent a year, the city will realise $280 million more for its holding in 10 years.

Dividends should also be taken into account. On the assumption that they will grow by 8 per cent a year, Auckland City should receive a dividend of $26 million for the 2012 year compared with $12 million last year.

Over 10 years, the interest cost savings from the repayment of debt will exceed dividend payments, but this will be more than compensated for by the capital appreciation of the investment.

It is worth noting that all the local authorities that have sold either Auckland International Airport or Ports of Auckland shares would have been better advised to hold them.

The results of two major sales are as follows:

* The North Shore City Council sold its 7.1 per cent airport stake in November 1999 for $87 million. This holding is now worth $127 million.

* The Waikato Regional Council sold its 20 per cent shareholding in Ports of Auckland for $64 million in 1993. This stake is now worth $179 million, including a capital repayment but excluding special dividends.

Last year this column argued that there was a strong case for Auckland City to sell its airport stake and use the money to foster business growth.

But there is no justification for selling these shares to repay debt and to put surplus money into a capital fund earning interest of 5.4 per cent a year.

The sale of the 25.7 per cent stake would be great news for the sharemarket but not for Auckland City.

As city councillors are mandated to look after the best interests of ratepayers, and not the sharemarket, there should be some interesting discussions at Tuesday's meeting.

* Disclosure of interest: none.

* bgaynor@xtra.co.nz