KEY POINTS:
Pity Auckland International Airport's directors. While most people are winding down for Christmas, they've been spending the weekend assessing a partial takeover offer for 40 per cent of the company.
Institutions are likely to take the view that the $3.655 offered by the Canadian Pension Plan Investment Board represents a premium for control.
Brook Asset Management is projecting that Auckland Airport shares will not trade at $3.655 again until 2015.
Certainly, Graeme Bevans, who heads infrastructure investments at the Toronto-based fund, is talking up the bid, saying he's confident the fund will get to its 40 per cent, with institutions probably accounting for the bulk of acceptances.
But the expectation around the market is the airport board will still recommend shareholders hold on to their shares when it issues its formal recommendation tomorrow with Grant Samuel's valuation assessment and projections on passenger and aircraft demand.
The directors' decision is not a simple one.
Partial bids are problematic as they reduce liquidity in the target company's shares (on completion), potentially depressing the share price for remaining shareholders. This is why the takeover code mandates that, in a separate vote, more shareholders must approve an offer than object to it for a partial bid to proceed.
The board previously chaired by John Maasland turned down an earlier amalgamation proposal from the Canadian fund, arguing it would have resulted in too much debt on the balance sheet of the merged company.
The Mounties have clearly taken on board some of the criticism of their first amalgamation proposal. They've gone back to the drawing board and refashioned their partial takeover offer. In the subsequent proposal, they hope to merge the airport with one of their shell companies to unlock higher (tax-effective) cash returns for shareholders, so overcoming the debt concerns.
The Canadians have also sweetened the deal for mum-and-dad shareholders by offering to pay brokerage fees for those who accept the offer.
But the Mounties are now up against a different set of directors with different concerns: Maasland and former director Mike Smith, who believed the Canadian deal should have been put to a shareholder vote, have resigned.
Tony Frankham is now in the chair and there are three new directors: Lloyd Morrison (CEO of Infratil), John Brabazon (nominated by Manukau City Council) and Richard Didsbury (nominated by Auckland City Council), were elected at the November 20 AGM.
At the first meeting of the reconstituted board it was determined that under NZX listing rules, Frankham, Keith Turner, Joan Withers and Richard Didsbury were independent directors - Brabazon and Morrison were considered not to be independent.
Irrespective of the latter pair's declared intention to act in Auckland Airport's best interests when it comes to assessing ownership changes, both have signalled strong views while lobbying to get on to the board.
It is quite possible that the major shareholder interests that nominated the new directors - Auckland City Council (12.74 per cent), Manukau City Council (10.04 per cent) and NZ Super Fund and Infratil (8.58 per cent) - will vote against the partial bid.
These interests are all believed to be against foreign ownership of more than 30 per cent of the airport.
If the Canadians manage to get their 40 per cent of shares, and shareholder approval to proceed from 50 per cent of those who take part in the separate vote, the three substantial shareholders could still block the proposed amalgamation, which requires a 75 per cent approval threshold.
As always the devil is in the detail.
First, debt: CPPIB has refined the terms of its planned amalgamation with Auckland Airport (assuming it gets to 40 per cent). Stapled securities issued under the proposed amalgamation will now include a convertible note with a face value of $2.75 (previously $3.35) an ordinary share with a face value of $.0.7055 (previously $0.1055) and $0.20 cash (unchanged).
The upshot is that the convertible note component has been reduced to $3.4 billion (an 18 per cent cut) and the share component increased six-fold.
The convertible notes would carry a 7 per cent coupon rate.
New bank facilities would be put in place on amalgamation. New debt would be drawn down to take the new airport group's debt to $1.3b, compared with an estimation by CPPIB of Auckland Airport's external debt by the end of the 2008 financial year of $1.1b.
CPPIB principal Scott Lawrence says it is the fund's intention that the debt-to-enterprise level would never rise above 40 per cent, which would be $2.152b on the current enterprise value of $5.38b, and cash flow must at all times be no more than twice interest costs.
The airport directors will no doubt be interrogating these numbers to see what they do to the company's risk profile.
The Canadians also have to get Overseas Investment Office approval for their partial takeover bid. This may still prove difficult at the political end, given New Zealand First's antipathy to foreign control of strategic assets. But the Canadians argue that they will not have effective control, as they will be able to vote only 25.7 per cent of the total number of airport shares on the election and removal of directors.
Lawrence expects the proposal will ultimately be referred to two ministers for approval, which he is confident of getting.
The amalgamation's success also depends on a favourable tax ruling from the IRD. Lawrence argues that the Canadians' prospective 40 per cent stake in Auckland Airport will enable the fund to present its shell company (the company that will hold the 40 per cent interest) as a substantial player. This is necessary for a tax-effective merger deal to fly.
All eyes will be on the airport board's recommendations tomorrow to see if it concurs.
If Frankham's board takes the view that the amalgamation will not get a favourable ruling (the previous Dubai deal was predicated on a much higher 51-60 per cent ownership stake), directors will find it difficult to recommend shareholders accept the partial bid.
