EMEA: Vinci Airports and the ADP privatization challenge

09 March 2018 - 03:34 pm UTC

Vinci Airports’ contribution to the wider group’s results has consistently increased over the years. Analysts have given top marks and see recent acquisitions as a transformational strategy to ensure long-term growth. But the privatization of ADP could be its biggest challenge yet. Antonio Fabrizio reports.

 

Things have changed a lot for Vinci Airports since 2013. In 2012, just before acquiring Portugal’s ANA Aeroportos, the French infrastructure giant’s airport business was marginal within the group. It comprised 13 relatively small airports between France and Cambodia, which collectively generated revenues of EUR 170m. It total it handled 9.6m passengers.   

All that changed in December 2012, when the Vinci subsidiary was selected to acquire ANA, the company which holds a 50-year concession contract for 10 Portuguese airports, including the country’s largest in Lisbon. The deal brought in total revenues to EUR 600m, EBITDA to EUR 270m, and quadrupled passenger numbers to 40 million.

This was the dawn of a new era for Vinci Airports. Flash-forward to last month, when Vinci published its 2017 results, and new acquisitions and expansions have seen a 33.5% increase in year-on-year revenues to EUR 1.4bn. EBITDA is three times the 2013 figure at EUR 808bn, and the total number of passengers, including equity-accounted companies, is 149m (for fully consolidated airports, the number is 83m).

 

ADP temptation


But Vinci Airports’ biggest attempted acquisition may just be around the corner, it could be it biggest challenge yet. Reports this week suggest France could kick-start as early as next month the process to privatise its main airport operator, Aeroports de Paris (ADP), of which the French state owns a 51% stake. Recording revenues for last year of EUR 3.61bn and EBITDA of EUR 1.57bn, ADP is one of Europe’s biggest airport operators.

Vinci owns 8% of ADP and as Moody’s senior analyst Raffaella Altamura said, it is “no secret that Vinci would be looking at it” if the privatisation were to be launched.

Analysts see this as a must-do investment to look into when the opportunity arises, because the Vinci Group generates mountains of cash that it needs to reinvest. But it would only be acceptable under the right circumstances and these depend on the type of privatisation the French government has in mind.

Santander equity analyst Vittorio Carelli said in a report that “without a clear framework for the transaction, it is almost impossible to estimate a price that would create value for Vinci”. This uncertainty is behind the recent poor stock performance of Vinci, according to Carelli, who noted that since November Vinci’s share price has barely moved from EUR 85 per share, while the EU airport sector has generally rebounded.

But Carelli believes that if Vinci were to pay anything above the current ADP share price, the deal might not please Vinci’s shareholders. Since Emmanuel Macron’s electoral victory, the ADP share price has gone up quite substantially on the expectation that there might be a sale. This continued in recent days with ADP shares reaching EUR 182 on Friday (9 March) following local media’s speculation that the French government will soon start discussions.

Commentators envisage two potential privatisation options. If the government sells a minority stake in ADP, then Vinci (or any other investor) would have to pay an expensive price, but without obtaining any control. In this case, the process would be smoother, because the French Parliament would only need to pass a law allowing the state to go below the 50% threshold, and not worry about changing the regulatory framework or launch discussions with ADP’s other shareholders. But, Carelli wonders, “is Vinci really interested in a minority stake, assuming that ADP’s shareholder structure will then be set in stone for a long time?”

Is Vinci really interested in a minority stake, assuming that ADP’s shareholder structure will then be set in stone for a long time?” Vittorio Carelli, Santander

 

The second option - which according to recent market reports, is the most likely - is the full privatisation of ADP, which would be more appealing for investors such as Vinci, even though it would require a significant premium. For Carelli, Vinci could be in the position to offer EUR 208 per share.

Natixis’ view is that Vinci could be willing to pay even more. Natixis infrastructure analyst Gregoire Thibault said that under the right circumstances, an ADP acquisition would be still accretive for Vinci at EUR 220m per share – but at this price it would have to deliver synergies of EUR 520m. In any case, selling a controlling stake would maximise the sale price the state can fetch, in line with the huge EBITDA multiples paid for recent airport M&A deals.

But deciding how to implement a full privatisation – whether to opt for a long-term concession; whether to split the current company into two, one owning the land and the other the concession; etc – would need to involve existing minority shareholders including Vinci, open discussions with the wider public, and therefore take time. But for Thibault, if Vinci has the opportunity to acquire ADP, it might be more “flexible” on issues such as an expected compensation from the government following the cancellation of the Notre-Dame-des-Landes (NDDL) airport concession in January 2018. “It is very likely that talks have begun behind the scenes”, Thibault said.

An ADP acquisition might also lead to a review of Vinci’s credit ratings (A- for S&P, A3 for Moody’s), because such a sizeable transaction would bring operational and integration challenges. For Moody’s Altamura, it would depend on how much Vinci would buy and how it would fund the transaction. “But it would be consistent with their strategy and they have some financial flexibility, and from a business risk perspective, increasing presence in the concession business is a positive. But we need to look at the details of any transaction first in order to fully assess any potential impact,” she added.

 

Why Vinci is betting on airports


The increasing importance of the airport business is the main pillar of a new strategy of Vinci Group’s management, which started exactly with the ANA acquisition five years ago.

“It is important to analyse the thinking behind this deal if we want to understand Vinci’s philosophy and strategy,” Thibault said. He argued that Vinci managers intend to focus on airports to offset an expected loss of value of French motorways within the next 20 years. “The group is now buying (airport) companies that have hidden value, which is expected to materialise over time and eventually partly compensate the diminishing value of French motorways,” he added.

This strategy was also recognised in a recent Fitch Ratings report, which highlighted how Vinci’s increasing concession life underpins the group’s cash flows with predictable revenues. “Vinci is investing in airports to maintain the average life of its concessions,” Fitch said, adding that the purchase of ANA helped increase Vinci portfolio’s average concession life by seven years.

Between 2012 and 2017, the group invested EUR 4.5bn in airports. ANA was the largest investment, and Carelli expects it to “continue to exceed expectations, due to the Portuguese airports group’s ability to grow sales by attracting new airlines, adding routes and improving its retail offering”. He expects however a future negative impact of EUR 300m in terms of valuation due to a revenue-sharing mechanism with the Portuguese government, whereby ANA will provide a percentage of its revenues to the grantor (1% from year 11 to 15, up to 10% from year 40 to 50).

Moody’s didn’t change Vinci’s ratings at the time of the ANA acquisition. Altamura said: “For transactions like this, there might be additional leverage, but that transaction also increased exposure to the most stable part of the business, and increased diversification away from France, which we thought was a positive”. Vinci kept its Baa1 until 2016, when Moody’s upgraded the company to the A3 level, which reflected an increased exposure to concessions and improved financial profile.

For Thibault, the market has also underestimated the contributions of Vinci’s recent airport acquisitions in Japan: Kansai Airport (pictured) and Osaka Airport in 2015, and Kobe Airport last year. Just like the ANA deal, which the Natixis analyst said has had a value creation of EUR 7 per share (Vinci’s target price is now EUR 103, according to the analyst), the Kansai airports in Japan will also “create a good deal of value, and the market is underestimating this value”.

The Kansai airports in Japan will also create a good deal of value, and the market is underestimating this value,” Gregoire Thibault, Natixis

 

He describes the Japanese deals as “a mini-ANA that is not so mini”. The Japanese airports are estimated to have contributed EUR 50m to Vinci’s net profit in 2017 and should bring EUR 58m in 2018. “This is a juicy return for a EUR 263m investment” (Vinci’s initial investment), the Natixis analyst said.

Japan is described as a “treasure island” in a 31 January 2018 Natixis report. The Kansai region is one of Japan’s most important economic areas, with air traffic increasing by 8.5% last year. Local tourism agencies expect the number of international visitors to continue to increase in the coming years, by 15% on average until 2020 and by 4% until 2030 – in part thanks to global events including the 2020 Summer Olympics. In addition, Vinci is now well placed for future privatisations in the country, Thibault added.

Apart from ANA and the Japanese airports, investments included the 2016 acquisition of a 60% stake in Aeroports de Lyon, which Natixis analysts expect to grow significantly.

In the last two years, Vinci also got a foothold in the Americas. In 2016 it acquired Aerodom, the concessionaire until 2030 of six Dominican Republic airports – which is expected to see a 3% annual traffic increase. In 2017, it won the Salvador Airport concession in Brazil, for which an ambitious capex plan is envisaged in the next 10 years. Vinci paid EUR 287m for the asset, which is above Natixis’ current evaluation. But the acquisition is seen as promising, whilst Natixis said it finds more difficult to justify other Vinci deals such as the LAMSAC motorway acquisition in Peru.

Last year, Vinci won another airport deal, the 25-year concession of Nikola Tesla Airport in Belgrade, the country’s largest. The deal includes greenfield investments, although Vinci has been more focused on brownfield deals recently.

At an investor day in November 2017, Vinci said it will systematically bid on M&As going ahead. The company said it has already identified 35 opportunities in the airport space globally. It said it will consider new geographies in addition to the ones where it already has a presence – which currently include France, Portugal, Chile, Brazil, Cambodia, Japan and Dominican Republic.

This has been factored in by rating agencies. According to Moody’s, the French investor is likely to “continue to make acquisitions in the near term, in line with its strategic objectives of enhancing cash flow diversification and increasing protection against adverse revenues/profitability trends, as experienced in respect of contracting activities”.

For Moody’s Altamura, the current A3 rating of Vinci reflects the mix of lower risk, more stable concession business including airports, and the higher risk contracting business. “We have seen that the significance of concession business has increased over time. The company has expanded its presence in airports, and this higher exposure supports Vinci’s credit profile” she said.

The relative geographic diversification also helps. “Generally, it is a positive – she said – because it brings balance to the company’s portfolio. For Vinci, the bulk of traffic is at airports in Portugal and France, so EBITDA for the division is still mostly generated in Europe”.

Analysts expect the company to continue with this expansion into new territories, leveraging on the know-how and capability of its management. But as Vinci CEO Xavie Huillard told analysts in a recent meeting, with the market becoming more expensive, Vinci will become more prudent on future acquisitions.

 

Vinci