Carr: Canadian firms eye U.K. Prize
Britain’s second busiest airport is for sale with a Canadian airport operator and three powerful pension funds wanting a piece. Vancouver Airport Services and Borealis Infrastructure Management
March 25, 2009 By David Carr
Britain’s second busiest airport is for sale with a Canadian airport operator and three powerful pension funds wanting a piece. Vancouver Airport Services and Borealis Infrastructure Management, an investment unit of the Ontario Municipal Employees Retirement System (OMERS), are each aligned with consortiums bidding for London’s Gatwick Airport. After being rebuffed in an earlier attempt to buy a 40 per cent interest in New Zealand’s Auckland International Airport, the Canadian Pension Investment Board (CPP) has teamed up with the Ontario Teachers’ Pension Plan and Jersey-based 3i Infrastructure plc.
Britain has run out of patience with the near monopoly abuses of BAA, operator of seven airports including London Heathrow, and has ordered Grupo Ferrovial, the Spanish-based controlling shareholder to break it up by selling two of three London airports, and one its three Scottish properties.
Gauging which direction the wind was blowing and anxious to cut some of its crippling US$37 billion debt, Ferrovial pre-empted the government order to sell and hammered a ‘for sale’ sign into Gatwick last summer.
More than 20 years after BAA was sold in an over-subscribed IPO, airport privatization appears to be heating up again, spurred by the sale of Chicago’s Midway Airport for US$2.5 billion to an investment group led by Vancouver Airport Services and Citi Infrastructure Investors, and by what is taking place in the UK. Midway is the first major airport sale in the US, and has generated interest by other cash-strapped American cities to privatize airports.
It’s not just airports. From bridges to toll roads, infrastructure investment is huge. CIBC World Markets estimates that extra infrastructure spending will reach $650 billion over the next two years as governments around the world scramble to fight the recession by building new and repairing the old. Pension funds – attracted by the long-term steady revenue stream that flows from essential public infrastructure – want in.
According to the Reason Foundation, a Los Angeles-based think tank, CPP and OMERS are among the largest current public pension fund investors in infrastructure. Caisse de Depot et Placement du Quebec has a minority stake in BAA and the Ontario Teachers have a 48 per cent interest in the UK’s Birmingham Airport along with Australia’s Victoria Fund Management. John Hancock Life Insurance Company, a division of Canada’s Manulife Financial Corporation, is part of the Midway deal.
Ferrovial hopes to complete the sale of Gatwick by April. Some analysts expect at least two of the consortiums to have pulled out long before then as they struggle to scrape together the money to complete the deal. However Gatwick shakes out, expect a strong Canadian presence in the queue for London Stansted and whatever Scottish airport BAA puts on the block (Aberdeen, Edinburgh or Glasgow). Ferrovial has even hinted at selling 15 per cent of its stake in BAA.
As Canadian investors scope out airport properties abroad, Ottawa sits on billions of dollars of non-essential assets while the federal government plunges into deficit for the first time in 15 years. Toronto’s Pearson International Airport alone is estimated to be worth at least $2 billion.
For some there will never be a good time to sell public infrastructure and would accuse the government of holding a fire sale if it attempted to do so during the current economic downturn. It is not an entirely hollow argument. Ferrovial had hoped to pocket between £2 and £2.5 billion on the sale of Gatwick, but will likely have to settle for £1.8 given tight credit markets and a 2.8 per cent dip in passenger volume.
But turf has always trumped economics in the resistance to privatize government assets and will continue to do so even during a rebound. Still, is a trim on the asking price or the drying up of revenue from airport rents after the sale sound enough reasons to hold onto an asset if the alternative remains greater deficits and higher interest payments on the debt? Especially since privatized airports would continue to generate revenue for the government in the form of corporate taxes and capital gains off shareholders.
Commercialization was Canada’s watered down response to privatization at a time when the government could no longer afford to invest in airports and Transport Canada was incapable of unlocking the full value of the assets. It worked. But as Canadian investment looks outward, it might be time for Ottawa to force airports in Canada to take the next step.