KEY POINTS:
The Auckland City Council would consider joining a takeover bid for Auckland Airport, and potentially increasing its shareholding, according to documents posted on the council's website for public feedback.
Other alternatives the council is canvassing for its 12.75 per cent stake in the airport are agreeing to the airport's being merged with another company or splitting it into several standalone companies.
The council says it has yet to receive a firm proposal, but is seeking public feedback on what to do with its airport shares after it was approached about selling them last month.
The public consultation documents outline the council's two objectives in considering what to do with its Auckland Airport shareholding: first, to realise some of the unrealised value of its airport shares, and second, to increase its control over the airport.
The Manukau City Council, which owns 10.5 per cent of the airport, has also said it would consider putting its shares into another vehicle to realise some of the value in the shareholding, but Mayor Barry Curtis has declined to be more specific.
The release of the documents over the weekend comes as the Auckland Airport board remains in discussions with an unspecified number of potential investors about taking a stake in the airport.
It is understood Canada Pension Plan Investment Board and Macquarie Airports are still in discussions, but another party - believed to be another airport operator - has dropped out of the process. Dubai International Airport is also rumoured to be interested in Auckland Airport.
Chairman Mike Smith confirmed last week some of the potential investors were conducting due diligence, but said this did not necessarily mean they would make a takeover bid.
Nonetheless, shares in the company have risen as high as $3.32 on expectation of a takeover battle. They closed down 1c at $3.29 yesterday.
But analysts at Citigroup said a takeover bid was far from certain, and attribute a 65 per cent chance of their being no bid for the company.
"We believe the gulf in valuation between existing holders and prospective bidders may be too wide for a deal to proceed," analyst Blair Cooper writes in a research note.
Given the quality of Auckland Airport and its status as the stock market's fourth largest company, most investors would want $3.50 to $4.00 to sell out, Cooper says. Citigroup's "best case" valuation is $3.37.
The airport is a difficult target for private equity because as a well-run business it would be difficult to extract value and sell four or five years later.
Also, the high cost of borrowing in New Zealand and the high kiwi make a private equity deal "problematic".
In its public consultation document, Auckland City Council says its airport stake is worth $495.3 million, based on a share price of $3.18. With annual dividend payments projected at $11.5, this represents a dividend yield of just 2.3 per cent, it notes.
"While shares in [Auckland Airport] have provided strong capital gains and a steady stream of dividends to shareholders over recent years, there is a great deal of unrealised value locked up in the company."
"Recently there has been considerable interest from investors and other parties who have been looking at ways to realise this potential value by significantly improving the efficiency of the airports financing structure."
The council also says it wants to increase what it refers to as "the strategic value" of its airport stake.
"Under current arrangements, despite being the largest individual shareholder, council has limited opportunities ... to further its strategic objectives with little input into the governance or management of the airport. As part of a consortium, council may be able to negotiate appointment of one or more directors to the board."
The six options
Possibilities for Auckland City Council as posted on its website.
OPTION 1: Join a consortium which will execute a full or partial takeover of Auckland Airport; maintain the council's 12.75 per cent shareholding in the airport by taking shares in the consortium.
OPTION 2: Agree to Auckland Airport merging with another company, and take shares in the new company, thereby reducing effective stake in the airport while still maintaining the same dollar value of equity investment.
OPTION 3: Agree to Auckland Airport restructuring, with its business units separating into standalone entities with the council receiving a proportionate equity stake in one or all of the standalone entities.
OPTION 4: In combination with any of options 1-3, increase shareholding in the airport above 12.75 per cent, funded by "utilising the value" of the Auckland Airport shares.
OPTION 5: In combination with any of options 1-3, selling some Auckland Airport shares.
OPTION 6: Selling all or some of the shares for cash, "or some other form of consideration".
