Wednesday, July 20, 2011

OTPP Swaps Assets With Australia's MAp Group

Sonali Paul and Narayanan Somasundaram of Reuters report, Australia's MAp agrees asset swap with Canadian fund:
Australia's MAp Group has agreed to swap airport stakes with Ontario Teachers' Pension Plan to beef up its holding in Sydney Airport in a deal worth A$1.6 billion ($1.7 billion), and flagged a possible cash return to shareholders.

The operator of Sydney airport will exchange its stakes in Brussels Airport and Copenhagen Airports for OTPP's 11 percent stake in Sydney Airport and A$791 million in cash, as it looks to simplify ownership of Australia's top airport.

The cash component was slightly lower than flagged when the proposal was announced in June, mainly due to the strengthening of the Aussie dollar against the euro.

After the deal, it will own 85 percent of Sydney airport and said it expected to make about A$1.5 billion available to MAp investors when the deal is completed, slated for the fourth quarter of 2011.

While MAp is trading its stakes in Brussels and Copenhagen airports for below their last valuation at A$1.94 billion, giving way to some concern, investors were still satisfied that the group was making progress on its plan to get out of other airports to focus on Sydney.

"It's disappointing they've decided to do it at this particular point in time when we're mid-way through the recovery in asset valuations," said Will Seddon, analyst at White Funds Management, which owns MAp shares.

"But that said, it cleans the structure up a lot and gives them absolute control of Sydney, which is a very good asset."

MAp shares rose 1.5 percent to A$3.44, underperforming the broader market , which rose 1.8 percent.

No decision has been made yet on exactly how MAp may return cash to shareholders, a MAp spokeswoman said.

"I guess they'll probably keep some powder dry for what opportunities may come up with respect to Sydney, but apart from that, the best thing they could do is return it to shareholders," Seddon said.

The biggest block to MAp taking full control of Sydney airport is German construction group Hochtief , which is trying to sell its airport concessions as a whole, including a 12 percent stake in Sydney airport.

OTPP will end up with a 39 percent stake in Brussels Airport and a 30 percent stake in Copenhagen Airport, adding to its airport holdings in Birmingham and Bristol in Britain.

"We believe that Brussels and Copenhagen Airports are excellent opportunities that strongly reflect our investment criteria and our long-term investment horizon," Stephen Dowd, senior vice-president of OTPP's Teachers' Infrastructure Group, said in a statement.

The Danish government remains the single biggest shareholder in Copenhagen Airports with a 39.2 percent stake.

Shares in Copenhagen Airports traded up 2.3 percent at 1,647 Danish crowns ($313.6) by 0724 GMT. ($1 = 0.934 Australian Dollars) ($1=5.252 Danish Crown)
Ontario Teachers' put out a press release on their website, Teachers’ invests in premier European airports:
The Ontario Teachers’ Pension Plan (Teachers’) has reached an agreement with MAp Airports (MAp) to exchange its interest in Sydney Airport and a cash payment for MAp’s interests in Brussels Airport and Copenhagen Airport.

The transaction will result in Teachers’ Infrastructure Group adding to its current airport holdings with ownership of 39 percent of Brussels Airport and 30 percent of Copenhagen Airport. MAp will receive Teachers’ 11 percent interest in Sydney Airport plus a cash payment. The transaction is expected to close in 2011, subject to regulatory approvals.

“We believe that Brussels and Copenhagen Airports are excellent opportunities that strongly reflect our investment criteria and our long-term investment horizon,” said Stephen Dowd, Senior Vice-President, Teachers’ Infrastructure Group. “As experienced airport investors, we look forward to working with the Belgian and Danish governments and other stakeholders to develop the full potential of these airports.”

Teachers’ Infrastructure Group’s other airport investments are Birmingham Airport and Bristol Airport, which are jointly controlled alongside other shareholders. Teachers’ Infrastructure Group makes investments that are subject to a fair and transparent regulatory framework and that generate stable, low-risk, long-term returns to help meet the plan’s pension obligations.

With $107.5 billion in assets as of December 31, 2010, Teachers’ is the largest single-profession pension plan in Canada. An independent organization, it invests the pension fund's assets and administers the pensions of 295,000 active and retired teachers in Ontario. For more information visit

Some comments on this transaction. First, I have never been to Australia (my dream is to swim with Great White Sharks at the Great Barrier Reef). Was at the hospital yesterday morning as part of some research study on transcranial magnetic stimulation in Multiple Sclerosis and one the Master's student shocking me with magnetic pulses was from Melbourne. I asked her why she decided to move to Montreal and she told me she followed her heart, married and moved here but she misses Melbourne and thinks the winters are brutal here (they are but so far we're having an amazing summer).

I do, however, know Brussels well because my mother and stepfather have been living there for the last seven years (he's a diplomat for the government of Quebec). I love that city. It's clean, classy and full of diplomats so most of the people are educated and cultured. You can drive to other cities like Bruges where you can visit museums and walk around to see amazing historical sites. Brussels is the hub of Europe. You can literally go anywhere from there. And the beer, fries and restaurants are awesome. Just writing about it makes me want to go back soon!

As for Copenhagen, it's a busy European airport so this too is a great asset for Ontario Teachers'. The terms of the deal are favorable for Teachers' and we'll see how MAp Group fairs out with its controlling stake in Sydney airport. I was told that group Hochtief, the German infrastructure powerhouse, is fighting off a takeover and is liquidating assets, so this could be a stumbling block for MAP taking full control. And just like Canada, Australia is going through its own bubble, dangerously overheating which could spell big trouble down the road.

All this to say that I think Teachers' did a good move here. However, airports are not always profitable ventures for pension funds. The Caisse de dépôt et placement du Québec, Canada's largest pension fund, took a huge writedown in 2008 from its troubled investment in British Airports Authority (BAA). These deals are complex and if the terms are wrong or all risks are not evaluated properly, pension funds will lose in the high stakes game of infrastructure investments.


A senior pension fund manager was kind enough to share his thoughts:
“High stakes game of infrastructure investing”? These are supposed to be low risk, stable assets serving LDI purposes. They are usually priced to provide enhanced bond like return and duration outcomes. Unfortunately, these assets are often way more cyclical than people chose to believe, and are often financed like LBO’s, which further exacerbate the cyclicality. That’s why not all pension plans believe infrastructure provides for suitable risk/reward. Too bad more pension plans don’t do greenfield projects. That’s where the social need is. Trading and financial engineering built assets is indeed a game. I am not playing a game, I am trying to create profits to pay pensions. It may be a decent investment, I don’t know enough about it. But just reminding how the deal making excitement and profile can eclipse the post deal follow through on how things actually work out.

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