Tuesday, July 31, 2007

Dubai Aerospace Enterprise Move on Auckland Airport: Will It Fly?

There has been much written about the recently announced "merger" of Dubai Aerospace Enterprise (DAE) with Auckland international Airport Ltd [AIA.NZX]

Let me give you my take.

DAE have offered the equivalent of $NZ 3.80 per share in quite a complex merger proposition that values AIA somewhere north of $NZ 5 billion in its entirety. This is substantially more than what the company was valued at before rumours of potential buyers started coming out of the woodwork a few months back. It was consistently trading at around the 2.20-2.40 range.

The hurdles that this merger proposition have to overcome are those that a midget would have trouble getting over even if he was thrown by a tall man.

Two city councils, Auckland and Manukau City, between them own almost 25% of the airport. Manukau Mayor Barry Curtis said they "wont sell" and the Auckland City Mayor, Dick Hubbard, has put proposals to be aired and voted on, one of the proposals includes ACC buying more AIA shares. It looks unlikely that these two shareholders will come to the party and sell, even at an increased offer.

The merger is also facing the wrath of other local and national politicians and the consensus of those in power and public opinion seems to be overwhelmingly in favour of don't sell. Public pressure against a sale is bound to resonate with a Labour Government wanting a 3rd term in 2008, its constituency would be overwhelmingly against such a sale.

The unpopularity of the AIA sale in the public's eyes focuses on the fact that they don't want to see a valuable "strategic" asset flogged off to any overseas company. Ironically though AIA is already owned 33% by foreign shareholders.

There are some, including yours truly, who have mentioned the obvious threat to national security that a bid from a Muslim backed company brings. We are reminded of last year when DAE was forced to relinquish ports bought in the US for similar security reasons. This itself alone is a good reason to block the sale of AIA to DAE.

I have no problem with AIA being sold to anyone else, foreign or local and in fact there is rumoured to be at least another seven possible buyers for AIA assets with a handful currently doing due diligence, among them are Melbourne airport owner, Australia Pacific Airport, Macquarie Airports and Canada Pension Plan. The last is said to be close to launching a bid.

The only problem that I see is price. While the offer by DAE is considerably more than historical AIA value placed on the company by the market AIA is a very attractive asset.

It is in a monopoly position, has one of the highest profit margins for any airport in the world and is highly undeveloped compared to foreign airports.

It is this undeveloped nature of the business that must seem the most attractive proposition to potential bidders. It is for me as a shareholder and I intend to hold long-term for that reason alone.

There are vast tracts of undeveloped land with uses for ancillary services for the airline business, retailing and hotel potential and a myriad of other possibilities. In fact AIA was discussing the possibility 2 or 3 months back of splitting the land/retail based assets of the business from airport business and trading the two entities separately on the NZX. That is where the value lies.

In my opinion the sale of AIA looks unlikely to anyone but when you have interventionist local and national politicians involved in public companies you never know what is going to happen. A couple of years ago Ports of Auckland, a publicly listed company, was bought by the Auckland Regional Council and delisted and before that Air New Zealand was grabbed by the State "in the interests of the country"

AIA CEO says the DAE offer "should be accepted by shareholders in the absence of another offer" but he himself has undervalued the very company he presides over and its shareholders.

Long-term the company is worth much more.

Disclosure: I own AIA shares

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