KEY POINTS:
Auckland International Airport's 50,000-plus shareholders have two important decisions to make before the Canada Pension Plan Investment Board's (CPPIB) partial offer closes on March 13.
They must first decide whether to vote in favour of the $3.6555-a-share offer that will raise CPPIB's shareholding to 40 per cent and then whether to accept in respect of their own shareholding.
The latest recommendation by the airport board has created considerable confusion, but it has become increasingly clear in recent weeks that shareholders should vote in support of the offer and accept in respect of their total holdings.
There are a number of compelling financial reasons why shareholders should support the bid. These include:
1. The company's price/earnings ratio (P/E) is exceptionally high at the offer price of $3.6555 a share.
As the accompanying table shows, Auckland International Airport (AIA) has an historic P/E of 43.1 and June 2008 year P/E of 43.9 at the bid price. These P/Es are based on the average post-interim result forecasts of the six major New Zealand broking firms.
This compares with average historic and prospective P/Es of 27.6 and 24.0 respectively for the 11 airports included in the Grant Samuel Independent Adviser's Report. The share price of most of these airports has fallen since the Grant Samuel report was completed with Airports of Thailand Corporation, which had the highest prospective P/E of 35.9, experiencing an 8.1 per cent price decline.
CPPIB's offer looks attractive on a P/E basis, particularly as the market average 2008 P/E has fallen from 17.2 to 14.3 since the offer was revealed on November 7. On this basis the airport's prospective offer price P/E of 43.9 is 3.1 times the NZX average, compared with 2.6 times when the offer was announced at the beginning of November.
2. Sharemarkets have fallen since the offer was announced.
The benchmark NZX-50 index has declined by almost 15 per cent since November 7 and the MSCI World Index by 8.1 per cent. Shareholders have the opportunity to sell shares at $3.6555, a price that reflects the pre-sharemarket downturn period.
3. Auckland Airport has a subdued short-term outlook, mainly because of more restrained traffic growth and higher funding costs.
Four of the six main broker analysts covering the stock have reduced their 2008 forecast in the past two weeks with the other two remaining unchanged. As far as the 2009 and 2010 years are concerned, two analysts have raised their earnings forecasts, two have reduced it and two remain the same.
The lower growth environment is dependent on how long the credit crunch and slowdown in retail spending impacts on the company's property development plans and retail income.
4. Grant Samuel concluded that Auckland Airport's full underlying value is in the $3.07 to $3.48 range.
Under Section 30 of a guidance note issued in August 2007, the Takeovers Panel recommends that independent advisers no longer describe offers as "fair" or "unfair".
Grant Samuel has complied with this new requirement, but his commentary gives a clear steer that the $3.6555 a share offer is attractive to shareholders.
Grant Samuel's valuation, which was included in the Target Company Statement dated December 17, is more likely to have fallen rather than risen over the past two months because of the softer economic conditions and a less robust short-term earnings outlook for the airport.
5. There is unlikely to be an alternative offer at the same price in the immediate future because of tighter global credit conditions.
Any alternative offer, either full or partial, or a capital restructuring will require debt funding. This is more difficult and more expensive to obtain in the current environment.
6. There are concerns that the airport board may not operate effectively if the CPPIB offer is unsuccessful because of the competing objectives of the three largest shareholders, Auckland City Council (12.7 per cent), Manukau City Council (10 per cent) and the Infratil/NZ Superannuation group (6.1 per cent).
The airport board has been unsettled over the past year. The situation has not improved since three new directors were elected in November if this week's confusing release to the stock exchange on the CPPIB offer is anything to go by. All three of the aforementioned shareholders want to have an influence on the airport but none of them are either big enough or has sufficient financial resources to take a dominant position.
Auckland City's stance is particularly worrying because it sends out confusing messages and its decisions are inconsistent. For example, Auckland Mayor John Banks endorsed the sale of a 12.8 per cent stake in AIA for $191 million in 2002 yet he now appears to oppose an offer for Auckland City's remaining 12.7 per cent stake even though CPPIB's is almost 200 per cent higher.
A successful CPPIB offer should bring more board stability and ensure that the airport is not adversely affected by a board of directors with numerous competing agendas.
7. Shareholders can accept the offer and buy back shares on the market after a successful bid.
Auckland Airport will remain listed on the NZX if CPPIB reaches its 40 per cent target, and all shareholders will have the ability to buy back shares if the Canadian offer is successful and more than 50 per cent of the votes are cast in support of the partial bid.
8. Finally, all six board members have recommended acceptance even though four of them have confused the issue by recommending a "no" vote in the ballot.
This column has consistently argued that New Zealand shareholders should not accept takeover offers, particularly from overseas parties, but this opinion has been primarily based on the belief that most offers in the past have been far too low.
This is only the second time - the other being Allied Domecq's successful bid for Montana Group in 2001 - that the column has argued that New Zealand shareholders are being offered a full and fair price by an overseas party.
Each takeover offer should be considered on its merits and it would be a major mistake if New Zealand investors switched from automatically accepting every offer, even if the price was ridiculously low, to a situation where they reject all offers, regardless of whether they offer full value or not.
Individual investors, who own approximately 30 per cent of the airport, will determine the outcome of the CPPIB offer because the three largest holders are expected to reject the bid while most fund managers will accept and vote in support.
If the bid is unsuccessful the share price is expected to drift lower although AIA should continue to have a P/E multiple in excess of the 2008 year market average of just over 14.
Ironically a decision by Auckland City and the other two large shareholders to reject the offer will make it more attractive for individual investors because they will be able to sell more than 40 per cent of their holding at $3.6555 a share.
Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management and his disclosure statement is available on www.milfordasset.com under his profile. Milford Asset Management holds 1.6 million AIA shares on behalf of clients.
bgaynor@milfordasset.com
