The super giant is teaming up with Queensland public service fund QSuper, and global manager Global Infrastructure Partners, with Goldman Sachs advising the consortium.
However, convincing ASX investors to sell a cash-cow like Sydney Airport could be a key challenge, as existing shareholders are loath to part with the monopoly asset without a big premium.
‘You certainly don’t want to give it away’
Sydney Airport may be eerily quiet at the moment, but it is a business that professional investors describe in gushing terms such as “unique,” “strategic”, or “irreplaceable.”
Privatised in 2002 by the Howard government, it is the busiest airport in the country, and the only one listed on the ASX. The monopoly asset (until Western Sydney Airport opens mid this decade) is close to the CBD and the main corridor into Australia for foreign tourists, and it enjoys a level of regulation described by analysts as “light.”
Investors say all these factors make it extremely attractive, with one big caveat: it is a long-term bet. In the past year, the airport’s profits have been shredded by the closure of international borders, and it has raised $2 billion in equity and frozen dividends. Future profitability will be heavily influenced by how much international travel recovers.
On this front super funds can afford to take a very long-term view, given they are building wealth some members won’t be able to access for decades. This long-term horizon explains the funds’ appetite for infrastructure assets, which often deliver stable returns linked to inflation. Sydney Airport is the quintessential long-term asset with an operating lease that runs until 2097.
However, the jury is out on whether the 42 per cent premium for Sydney Airport will be enough to convince the Gonski-chaired board to say ‘yes’. Naturally, most investors are hopeful the renowned deal-maker Gonski, and advisers including UBS and its former local boss, Matthew Grounds of Barrenjoey Capital, can squeeze out a higher offer.
Senior investment officers at fund manager Argo, Andy Forster, says despite its challenges the airport is a “fantastic asset” poised to benefit from cashed-up consumers wanting to travel more, and the rising middle class in Asia travelling to Australia
“It’s a pretty strategic and unique asset at the end of the day. You certainly don’t want to give it away,” he says.
Mark Freeman, managing director of AFIC, also emphasises the listed investment company he runs is a long-term investor, arguing the current period of COVID is relatively short in the life of the airport. AFIC hasn’t made any decisions about the bid, but does not appear to be a keen seller. “We invest for very long periods of time and this is what we would call a very strategic, irreplaceable asset.”
He says it is an ideal time to be buying such an asset, and IFM’s strategy is “smart.” “But from what we are doing, we need to be thinking about value from a long-term perspective, not the last 12 months.”
‘We invest for very long periods of time and this is what we would call a very strategic, irreplaceable asset.’
Mark Freeman, managing director AFIC
There are also longer-term challenges facing the airport, including competition from a new rival airport in Western Sydney, and fallout for inbound tourism from political tensions with China.
Even so, brokers this week said the bid may need to be lifted to get a deal over the line, and further exciting the market, speculation quickly emerged a Macquarie-led consortium was considering a potential challenge.
However, a rival bid would not be straightforward given the sheer amount of capital needed and a 49 per cent cap on foreign ownership.
One source close to the bidders said members of the consortium had been eyeing off Sydney Airport for years, and putting together the proposal had taken some time. “Opportunism doesn’t really come into it. It takes a lot of effort to corral all the right people. It’s not something you can just sort of turn around in a couple of weeks or even months,” the source said.
Infrastructure’s juicy returns
Whether the deal ultimately happens or not, it almost certainly won’t be the last big offer for a key infrastructure asset from the burgeoning superannuation sector. The reason is simple: owning these assets has been highly lucrative.
Mano Mohankumar, senior investment research manager at Chant West, says in the decade to May, unlisted infrastructure returned 10.5 to 11 per cent a year after fees. That compares with 8.8 per cent (before fees) from Australian shares, or 11.3 per cent from global equities.
“If you’ve had a meaningful allocation [to infrastructure] over the years you would have benefited quite a bit,” Mohankumar says.
It’s a trend that has benefited industry funds more than most, as Mohankumar says a typical not-for-profit fund has about 9 per cent in unlisted infrastructure, compared with about 2 per cent for retail funds.
However, the same factors that make assets like Sydney Airport so attractive to investors have also made airports a regular target of Australian Competition and Consumer Commission scrutiny (ACCC). The regulator’s fundamental concern has been that airports are unregulated monopolies that hold the power in negotiations, and can steadily raise charges for airlines, car parking and retailers.
Former ACCC chairman Graeme Samuel, chairman of airline lobby group Airlines for Australia and New Zealand, has concerns that if a takeover of Sydney Airport does happen, the price being paid by the new owners would give them even more reason to raise charges.
“The price being paid requires a return on investment – there’s no magic in that. No one will ever persuade me that there’s a benevolent streak in the institutional investors in the airports,” Samuel says.
“Their driving motivation is to increase their returns. How do they increase their returns? Through higher charges.”
Against this, it is notable that the airport is already part-owned by a big super fund – its largest shareholder is UniSuper, which holds 15 per cent stake and will be crucial to any deal.
But Samuel also raises concerns about the wider trend of industry super funds owning more and more infrastructure, suggesting the federal government should examine the issue.
“The more they invest in infrastructure, the more it comes under common ownership and control,” he says. “The whole thing is starting to look awfully concentrated, well over what ought to be occurring in Australia.”
The office of the Minister for Infrastructure, Transport and Regional Development, Barnaby Joyce, did not comment on these concerns raised by Samuel.
‘No one will ever persuade me that there’s a benevolent streak in the institutional investors in the airports.’
Graeme Samuel, former ACCC chairman
But it is a concern that former IFM chairman Weaven dismisses as self-serving. He argues the market for infrastructure assets is global and open for others to compete in. “It’s a worldwide capital market, so the competition is not amongst industry funds for deals, it’s amongst the world players,” he says.
Shareholders in Sydney Airport will certainly be hoping that some of these global players – subject to the foreign ownership cap – consider joining the bidding.
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