KEY POINTS:
Auckland Airport shareholders might be feeling a bit confused right now.
Last week their board turned down an offer by the Canada Pension Plan Investment Board and this week CPPIB has gone to shareholders with a cash offer.
The problem remains that while CPPIB and the previous potential
bidder, Dubai Aerospace, revealed their intentions to restructure the airport company to make it more tax-efficient, the details on how this might happen remain sketchy.
Shareholders are being asked to make a decision on whether to sell now or stay in for the long haul without knowing what the restructure might entail or whether there are significant gains in it for them.
Market sources, including the Canadians and Infratil and even the airport board itself, recognise the current company has a lazy balance sheet and that it could carry higher levels of debt. If it was to pay out more interest on its debts this could also be used to reduce tax liabilities.
At the last balance date, AIA's debt was $913 million or a ratio of 47 per cent debt to equity and cash interest coverage of 4.1 times. For many companies this would be seen as a high level but the airport is a key piece of infrastructure with a monopolistic position.
As a strong cashflow generator with stable and predictable earnings, it has the ability to meet interest payments on higher levels of debt while also pursuing growth opportunities.
Some have suggested it could almost double its current debt level. But part of the reason why AIA's board said it rejected CPPIB's offer last week was because the level of proposed debt increase would have been too risky.
So if the board already knows the company could carry more debt, why hasn't it restructured the business by increasing debt levels and returning capital to shareholders?
A big factor is the tax element. If the company increased its debt and returned capital to shareholders, it is likely investors would be stung by tax on their returns because it has already used up its imputation credits in a previous payout.
Companies are also not allowed to restructure for the sole purpose of tax avoidance but a takeover would open the door for restructuring.
Merger and acquisition experts say the process is likely to occur by the company being merged into a special purpose vehicle. But because the AIA board has declined the initial offer which would have rolled it all into one, CPPIB would have to restructure the company in a second step - a move which has some feeling nervous as it would set a precedent.
There are concerns that CPPIB might get through the first stage - buying a major stake - and then be told by Inland Revenue it can't proceed, which could stop a payout to shareholders going ahead.
But others in the market believe CPPIB would not have got this far without serious consultation with its lawyers and tax accountants on whether the process would be a success.