Opinion: Sceptical public may ditch Dubai bid

By NZPA

Friday 27th July 2007

A sceptical public and Auckland's local body elections, aided by nationalism, may scupper the only bid to float thus far for control of Auckland International Airport.

Eight potential bidders are lined up on AIA's runway but only Dubai Aerospace Enterprise's (DAE) has taken off.

That it is prepared to pay -- $3.80 per share or $2.3 billion -- for 51% of New Zealand's largest airport shows some offshore investors see value in the medium-term that myopic locals miss.

And while AIA is a strategic asset as the main gateway to the country, it is not as if a) New Zealand ownership of assets is a guarantee of success; b) we are unsullied by foreign ownership; and c) our investments are being swelled by dairy income from "white gold" to the extent that oil has enriched the Middle East.

Certainly, DAE's bid is complex. Shareholders will get $2.34 a share cash plus a 7c dividend plus a share valued at $1.39 stapled to a loan note in a new company that will own the airport.

And state-backed DAE does not share all the same motivations for New Zealand tourism, infrastructure and capital markets that New Zealanders do. But it is a big noise in a region where New Zealand is actively working to increase trade, and which is our seventh-largest trading partner.

Year-old DAE, with a mere $US15 billion ($NZ20 billion) to spend, offers the amounts of money and projects that attract the best and the brightest that capitalism has to offer.

As well, DAE is chaired by Sheikh Ahmed bin Saeed al Maktoum, who also happens to chair Dubai-based Emirates, the world's eighth largest airline.

Emirates has ambitions to set up a secondary hub in Auckland to stage into the West Coast of the US. While that might be bad news for Air New Zealand, it would be good for AIA.

Politicians have mined a rich seam of nationalistic fervour over AIA despite locals generally rejecting such investment for housing.

A survey in June, after the Canadian Pension Plan Investment Board approached the Auckland and Manukau city councils with $3.10 per share, showed no enthusian even at an "attractive" price.

NZ First leader and Foreign Affairs Minister Winston Peters decreed AIA as a strategic asset that must not be sold and his sentiment is shared by Manukau mayor Sir Barry Curtis, who is currently involved through his council's 10% stake.

Both conveniently ignore the fact that already one third of AIA is in foreign hands.

Curtis and Auckland mayor Dick Hubbard may not still be around at the November shareholder vote, with local body elections in October.

Curtis was elected last time by the slimmest of margins, while Hubbard will be up against populist old warhorse John Banks who also opposes a sale.

Auckland City stands to get a cash windfall of $375m while retaining a 6.2% holding in the new company, and Manukau could get $281m and 5%, if they go with the base offer.

But under one scenario outlined by DAE chief financial officer Hamish De Run, it could see their stakes rise without paying a cent.

Manukau's holding could jump to 12 or 13% and Auckland from 12.75% to 15%.

If the 77% of non council shareholders take all payments in cash, the councils could trade the $2.34 cash component for the stapled securities of the new company.

"So if you do the maths -- $2.34 divided by $1.39 -- you're getting an additional one share plus a fraction," De Run said.

Aucklanders could be convinced, but they would have to be reassured the proceeds of selling the family silver would not just sink into general expenditure. But both councils are in for a big fight, with rates going through the roof and little in the way of visionary developments to show for it.

To say the councils face a sceptical public is an understatement.

One industry source said DAE appears at first glance to offer genuine strategic benefit. The concerns of Curtis over strategic assets were legitimate "because NZ Inc shouldn't end up being the loser because a bunch of shareholders want to sell us off to an airports for oil swap".

"That's rational, but the issue now is, will people look at the Dubai bid and make a genuine assessment of what its strategic benefits will be."

One strategic factor is the willingness and ability of the company to keep expanding capacity, something AIA has excelled at.

"Could we end up with a problem where the main gateway to the country was somehow impeded because the company hadn't invested well or sufficiently in itself?" the source said.

DAE clearly has jumbo planes of cash and seems willing to invest in expansion. Compared with, say, Melbourne airport owner Australia Pacific Airport, also a possible bidder, DAE will expand route development that would help attract additional airlines. Already strong export links to the Gulf and Middle East will grow.

Among the airport's jewels is its land holding, which provide two-thirds to three-quarters of AIA's value. An issue is which of the potential bidders is going to be most active on this issue.

Whether DAE is successful or not, the game has changed.

AIA shares have jumped 43% since speculation about takeover activity began and are unlikely to subside much even the bid fails.

Airports are a hot asset class. The Centre for Asia Pacific Aviation estimates specialist funds have amassed $US50 billion for airport investment in emerging markets.

While India and China together are planning more than 145 airports over the next decade there are vast volumes of cash chasing such investments.

Sovereign wealth funds -- state-backed investment vehicles -- will have an estimated value of $US2.5 trillion by end of year, even more than the estimated $US1.6 trillion of hedge funds, according to the Economist magazine.

That is expected to swell to $US12 trillion by 2015. Among many other investments, such funds will be looking for secure utilities. New Zealand is likely to remain a premier tourism destination and the main gateway airport is certain to remain a fine cash cow.

Macquarie NZ investment director Arthur Lim does not believe xenophobic issues will shoot down DAE's bid.

"If Ferrovial which is a Spanish company can buy... Heathrow Airport which is as British as they come, and the British are not nearly as in hock as New Zealanders are to overseas capital, I don't see politics as the ultimate determining factor as to whether the deal gets done or not,"

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