The Sydney Airport Holdings Pty Ltd (ASX: SYD) board has unanimously recommended against an indicative proposal to acquire 100% of the company.
In an announcement to the market, the board said the offer “undervalues Sydney Airport and is not in the best interests of Securityholders”.
The proposal was made by a consortium of infrastructure investors including IFM Investors, QSuper and Global Infrastructure Management.
The offer valued Sydney Airport shares at $8.25 or on an enterprise value of $30 billion.
SYD share price
Not good enough
The board outlined a number of reasons why it believed the offer undervalued Australia’s largest and only publicly listed airport including:
- Strategic and irreplaceable nature of Sydney Airport
- Long term concession lease with 76-years remaining until expiry
- Opportunistic nature of the proposal given the impact of COVID-19 on airport performance globally
- The proposal values the company below where it traded before the pandemic
- Diverse earnings streams including aeronautical, retail, property, car park and ground transport
- Value of Sydney Airports land assets and potential for future development
- Strong capital position and cost control to position itself for the post COVID-19 recovery
“The Board recognises that the security price is likely to trade below the Consortium proposal’s indicative price in the short term, however Sydney Airport will only progress a change in control transaction on terms that deliver and recognise appropriate long term value for Sydney Airport Securityholders”.
Essentially if the consortium wants to proceed with the transaction, it needs to up the offer to incentivise Sydney Airport to open its books.
My thoughts
The board’s initial comments suggested that the offer wasn’t good enough and a week later that was confirmed.
While I didn’t believe the initial offer accurately reflected the value of Sydney Airport, I’m surprised that the board opted not to engage further.
The board noted that “the indicative price is below where Sydney Airport’s security price traded before the pandemic”.
This is technically true, however, when accounting for the capital raise in August 2020, the share price offer is actually above where Sydney Airport previously traded.
The capital raise increased the share count by approximately 19%. Therefore the original share price high of around $9.00 in August 2020 is effectively $7.54 without accounting for the cash proceeds.
This makes $8.25 look reasonable.
I would also challenge the board’s assertion of the “irreplaceable nature of Sydney Airport”. Western Sydney Airport is set to open in 2026 and will likely take some market share away from Sydney Airport.
Notwithstanding the above points, Sydney Airport is a high-quality Australian infrastructure asset. As a result, the company will attract the attention of pension and infrastructure funds looking for secure long-term returns.
Any proposal will need to be at a premium given the boards and investors reluctance to give up the company.
I expect this won’t be the last we hear of a proposal for Sydney Airport.
