The Sydney Airport Holdings Pty Ltd (ASX: SYD) share price closed on Monday trading up 33.91% to $7.78 after the company received an acquisition proposal.
The offer was at a significant premium to Sydney Airport’s current share price.
Will $8.25 be the highest Sydney Airport shares fly? Or will the share price continue to gain altitude?
SYD share price
Institutions circle
The unsolicited and conditional offer proposes the acquisition of 100% of Sydney Aiport shares for $8.25 per share.
This is a 42% premium to Sydney Airports closing price on Friday last week and values the company at approximately $22 billion.
The offer was made by a consortium of institutional infrastructure investors including IFM Australia, IFM Global, QSuper and Global Infrastructure Management.
Acceptance of the deal is subject to a number of conditions.
Management cautions against the first offer
The Sydney Airport board will commence an assessment of the proposal.
The board noted the offer was made in the midst of “a global pandemic which has deeply affected the aviation industry and the Sydney Airport security price”.
The offer is below where the Sydney Airport share price traded prior to the pandemic.
Given the board’s opening comments, it seems more unlikely than likely the offer is accepted. However, this may open the door for a revised offer or the potential for new bidders to emerge.
Infrastructure replaces bonds
With the majority of central bank interest rates below 1% – even negative in some cases, investors are turning to infrastructure assets as a substitute for bonds.
Bonds and infrastructure share similar characteristics such as predictable cash flows and low relative volatility. Moreover, infrastructure assets often command a monopoly market position increasing barriers to entry for competitors.
As a result, infrastructure assets are in hot demand and valuations are rising sharply.
Just last week a consortium comprising of the Future Fund, Commonwealth Superannuation and Sunsuper purchased a 49% stake in the Telstra Corporation Ltd (ASX: TLS) tower network.
The transaction values Telstra’s 8,200 InfraCo Towers at $5.9 billion, representing a FY21 enterprise value to EBITDA multiple of 28.
Another recent example is the acquisition of Vocus’s 30,000 km fibre network by Macquarie Infrastructure and Real Assets (MIRA) and Aware Super. This deal was valued at an enterprise value of $4.6 billion or an EBITDA multiple of 12.
Sydney Airport is particularly attractive to investors due to its 99-year long-term lease concession with the federal government which expires in 2097.
My take
It’s been 16 months since airports were bustling with travellers. The emergence of Zoom and work from home will likely reduce the amount of future business travel.
Conversely, once borders reopen there will be a surge in leisure travel abroad as families reunite.
To what extent consumer habits have changed is largely unknown. Therefore forecasting and determining a valuation on Sydney Airport shares is difficult.
Using FY19 – the last full year of uninterrupted travel, Sydney Airport paid a total distribution of 39 cents per security. Based on Monday’s takeover proposal of $8.25, this values shares at 21x FY19 distributions.
I believe this valuation does not accurately reflect the value of Sydney Airport, given its dominant market position and asset backing.
I also think if a bid was to be accepted, it would have to be a home run. Sydney Airport is the only remaining Australian airport that is publicly listed and a staple of many portfolios.
I expect Sydney Airport shares will continue to hover around the $8 range in the near term and the potential for new bidders to emerge.
