Tuesday, May 7, 2013

PSP Investments Bets Big on Airports?

Bertrand Marotte of the Globe and Mail reports, PSP Investments buying Hochtief airports unit for $1.4-billion:
Canada’s Public Sector Pension Investment Board is buying the airports unit of construction group Hochtief in a deal valued at $1.4-billion (U.S.).

The division – Hochtief AirPort GmbH– has interests in the airports of Athens, Budapest, Dusseldorf, Hamburg, Sydney and Tirana.

The deal, which is retroactive to Jan. 1, 2013, is expected to close in the second half of 2013.

Like its fellow public pension plan managers, Montreal-based PSP Investments is out to diversify its portfolio, with increased activity in infrastructure, real estate and private equity.

Earlier this year, it bought a 50-per-cent stake in the TD Canada Trust office tower in downtown Toronto from OMERS for $465-million (Canadian).

For its part, Hochtief is selling assets in airports and real estate as part of a shift to a focus on ground transportation and energy infrastructure projects.

Hochtief is controlled by Spain’s Grupo ACS.

“The transaction is the result of a very competitive tendering process. We will use the released funds as planned to reduce debt and to invest in the operating infrastructure business,” Hochtief chief executive officer Marcelino Fernandez Verdes said in a news release Tuesday.

“Hochtief AirPort is passing into the hands of a long-term and trustworthy investor which will continue to support the airports business in a responsible manner,” said Peter Sassenfeld, chief financial officer and member of Hochtief’s executive board.

PSP Investments had net assets totalling $64.5-billion at the end of March, 2013. It manages investment portfolios for the federal Public Service, the Canadian Forces, the RCMP and the Reserve Force.
Alex Webb and Sheenagh Matthews of Bloomberg also report, Hochtief Sells Airports Unit to PSP Investments in Revamp:
Hochtief AG, Germany’s largest construction company, agreed to sell its airports division to Public Sector Pension Investment Board of Canada as it narrows its focus to building.

The deal values the business, which has stakes in airports in Athens, Budapest, Dusseldorf, Hamburg, Sydney and Tirana, at about 1.5 billion euros ($2 billion) and Hochtief will get 1.1 billion euros as some shares are held by business partners, the Essen, Germany-based builder said in a statement.

“The price makes it look more like a gift,” said Marc Gabriel, an analyst at Bankhaus Lampe KG. “In the end, there’s not much left for the shareholders because no extraordinary result was achieved with the sale. OK, they managed to sell it after almost four years, but the price is not sexy.”

Chief Executive Officer Marcelino Fernandez Verdes, who took over in November and comes from majority owner Actividades de Construccion & Servicios SA of Spain, is reversing a decade- long strategy of expanding into services. Hochtief, scheduled to report first-quarter earnings today, is also looking into selling its real-estate development, facility and energy- management units.

“You can’t generate much margin with infrastructure and building and you have to take on high risk,” said Bankhaus Lampe’s Gabriel, who has a hold rating on the stock. “That puts a big question mark on whether it will work to completely focus on building again.”
Beating Estimates

Hochtief predicts a full-year pre-tax profit of between 600 million euros and 680 million euros after the sale of the airports, with net income reaching between 180 million euros and 220 million euros, it said today. It had earlier forecast net income of between 174 million euros and 190 million euros. The forecast excludes restructuring costs.

First quarter pre-tax profit climbed to 123 million euros from a year-earlier loss of 92 million euros. The average estimate of three analysts surveyed by Bloomberg was 111 million euros.

Hochtief shares rose 5.1 percent to 56.11 euros as of 10:15 a.m. in Frankfurt trading, valuing the company at 4.3 billion euros. Before today, the stock had risen 22 percent since the start of the year, while the Stoxx 600 Construction and Materials Index gained 4.2 percent.
Several Attempts

In a failed attempt to sell its six airports last year, bidders including Vinci SA (DG), Europe’s biggest builder, and China’s HNA Group, offered more than 1 billion euros for the unit, while Hochtief valued it at as much as 1.6 billion euros, people familiar with the process said at the time.

“The transaction is the result of a very competitive tendering process,” and Hochtief expects no significant “extraordinary earnings impact from the transaction,” it said in the statement. The sale to PSP Investments, based in Montreal, is subject to certain conditions and the transaction is expected to close in the second half of the year.

Hochtief may pay a special dividend following its disposals, Fernandez Verdes said when presenting 2012 full-year results in February.

Hochtief, the builder of Frankfurt’s Commerzbank tower, plans to dedicate the proceeds from unit sales to repaying debt, investing in the infrastructure division and entering new industries, it has said.

“The reason they give for the sales is to bring down net debt,” Gabriel said. “The net debt of Hochtief isn’t really the problem, it’s more the net debt of ACS.”
Greek news also covered this story of Hochtief selling its concession stake in Athens' Eleftherios Venizelos airport. This is a huge infrastructure deal and I think PSP Investments is picking up a nice portfolio at an attractive price. I commend Bruno Guilmette, PSP's senior VP of Infrastructure Investments, and PSP's senior managers for closing this deal.

Still, concession stakes in airports aren't without risks and pension funds need experienced professionals to manage these assets once they buy them. I have the perfect candidate for PSP Investments, someone who has worked on a major infrastructure  project in Greece. He has extensive contacts with senior VPs at the top European infrastructure companies and knows the political landscape in Greece extremely well. He's smart, hard working and honest (Note to PSP: Jim Pittman knows him and he has applied to the position of Manager, Infrastructure Investments).

We haven't heard much from PSP and I'm surprised such a huge deal and other deals in private markets aren't reported in their news releases, but I know them well and they prefer to fly under the radar (cover their investments in their annual reports).

Once again, I commend PSP Investments for closing this deal and think it will serve their members well in the future as the global recovery takes hold. My only regret is that I'm no longer part of this organization and can't work with the office of the CIO on this and other investment decisions.

Below, a little video on why so many tourists love to visit Greece. Tourism will be booming this summer, keeping the Athens airport, one of the nicest in Europe, extremely busy.