Atlantia; Market Cap: €19.57bn (as of 4th March 2016) 

The Deal 

On February 2, a consortium led by Ontario Teacher’s Pension Plan (OTPP) and formed by OMERS Private Markets, Alberta Investment Management and Wren House (fund of the Kuwait Investment Authority), announced the acquisition of London City Airport (LCY) for £2.0bn. The airport was put up for sale in August 2015 by Global Infrastructure Partners (GIP), which had 75% of the airport, with the remaining25% owned by Oaktree Capital.

Showing steady growth in traffic since its foundation in 1988, in 1995 LCY reported 1.5m passengers per year. Connected to the financial center of Canary Wharf through the DLR, the airport became popular for business travelers and was acquired in 2005 by Global Infrastructure Partners and AIG Financial Products for £750m, with the latter selling its stake to GIP and Oaktree in 2008. The consortium led by OTPP believes in the strategic location of the infrastructure, given its unparalleled central position that allowed it to reach 4.2m passengers in 2015 and given a £200m investment plan to increase the number of passengers to 6.0m by 2023, which is currently blocked by authorities over concerns regarding sound pollution.

Valuation Concerns 

The price paid by the consortium has led to major concerns, expressed mostly by British Airways (BA), the major player at LCY. The company has announced that the increase in fares caused by the large premium paid on the acquisition, would lead them to pull most of their aircrafts out of the airport. In particular Willie Walsh, CEO of the group which owns British Airways, defined the £2bn valuation a “foolish price”.

Looking at comparable acquisitions in the airports space, BSIC’s view is in line with BA’s executives. For the valuation purpose we used Manchester Airport Group’s acquisition of Stansted (EV of £2.4bn, 15.6x LTM EBITDA, year 2013), GIP’s acquisition of Edinburgh Airport Ltd (EV of £1.3bn, 16.7x LTM EBITDA, year 2013).

The valuation of LCY represents a multiple of 44x London City’s EBITDA of £45.8m, while the average multiple paid in similar transactions is around 15x LTM EBITDA.

However, it is clear the LCY has always attracted the attention of investors more than its competitors for its strategic position in London. As a result, when LCY was acquired in 2006 (pre-crisis), GIP paid a multiple of 35x EBITDA.

Airports’ fever & Atlantia

The consortium led by OTPP wasn’t the only bidder for London City Airport, with both infra funds and industrial players submitting their offers to Global Infrastructure Partners. HNA Group, Chinese player which made $17.0bn in acquisitions in 2015, including $7.6bn spent for Avolong Holdings and CHF2.7bn for Swissport International Ltd, failed in its attempt to get LCY.

Atlantia, the Italian €19.57bn market cap company which operates and constructs motorways, airports, parking areas and other transportation infrastructures, submitted an unsuccessful bid itself, trying to boost its strategy focused on international expansion and Italian divestitures.

Founded in 1950 as Societa’ Concessioni e CostruzioniAutostrade, the company took part in the engineering, construction and management of the major highway infrastructures in Italy. In the early 2000s the company had three subsidiaries: Autostrade per l’Italia (ASPI), highway operator, S.D.S S.p.A, administrative component, and TowerCoS.p.A to manage relationships with the major telecom operators. Following a failed bid by the Spanish AbertisInfraestructuras to incorporate ASPI, in 2007 the holdco was called Atlantia S.p.A. After its expansion in Brazil in 2012, the business merged with GeminaS.p.A, major shareholder of Aeroporti di Roma, giving rise to its presence in airports.

Currently Atlantia’s portfolio of airports is still almost exclusively focused on Aeroporti di Roma (Fiumicino and Ciampino), valued €4.0bn, 30% of which Atlantia wanted to sell in 2015 to Abu Dhabi Investment Authority and Ginko Tree. The deal was dropped a few months later not because of poor demand, but mainly due to a strategic review of the company. Well into 2016, Atlantia is now trying to sell a 30% stake in Autostrade per l’Italia (ASPI), the Italian highway operator and the company’s major business, for c. €5.0bn.

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Atlantia’s Strategy 

There are several possible scenarios if the sale of ASPI goes through, since Atlantia could either decide to use the proceeds to reduce debt (unlikely first scenario) or to partly pay down its debt and partly perform strategic acquisitions in the infrastructure space (likely second scenario.)

For what concerns the first option, we have considered the FY2015 results reported yesterday (Thursday, March the 4th) by the company in a press release, showing net debt of €10.4bn. In the case Atlantia uses the proceeds (€5.0bn) to pay down debt it will have an average debt in 2016 of €5.4bn, paying a figure of interest expenses much lower than today’s and hence boosting EPS. However, with a current net debt/EBITDA of 3.2x, a strong cash flow generation and a continuing dividend programme, the company looks pretty solid and the debt reduction plan, in our view, wouldn’t be the most effective use of the proceeds.

In the second case we assumed that some of the €5.0bn proceeds will be use for foreign acquisitions, and we analysed possible targets and recent rumours regarding Atlantia, while the rest will be used for a buyback announced on the 4th of March 2016 and still subject to approval.

Atlantia’s strategy for the upcoming years is mainly focused on the airport business: currently planning to invest €11.0bn to build a new terminal, together with improving the older one, at FiumicinoAtlantia wants to reach 100m passengers per year, more than double the number of passengers in 2015 (44m). Moreover, after the failed bid for LCY, the company is looking for strategic takeovers worldwide to build a solid ground for international expansion. Atlantia’s CEO Castellucci declared the management is now considering a few strategic investments to be made in 2016, and fortunately there are many airports up for sale! The Airport of Nice, in southern France, which value is estimated around €1.6bn, is considered a great opportunity by Gilberto Benetton, controlling shareholder of Atlantia. The French government owns 60% of the infrastructure which is going to be privatized soon, together with the Airport of Lyon-Saint-Exupery. Unfortunately, the Italian infrastructure leader could find itself in the middle of a bid war with a consortium led by Ardian, fund with €55.0bn of assets under management and owning 49% of the Airport of Luton in UK. However, the Italian player could take part in the auction partnering with a local player, such as Electricite de France – major European utility, or Vinci SA – French construction and infrastructure group.

For what concerns overseas opportunities, Mr. Castellucci remarked Atlantia’s strong position as the first highway operator in Chile, underlining that the company is interested in making a competitive bid for the Airport of Santiago de Chile to further consolidate its position in the country.

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