Sydney Airport Holdings’s board rejects $16.81 buyout offer citing undervaluation, open to higher offer

On Monday, Sydney Airport Holdings Pty Ltd said it has rejected an improved bid worth $16.81 billion (A$22.80 billion) from a group of infrastructure investors since it felt it was undervalued; it went on to add, it was open to a higher offer.

The new offer had valued Sydney Airport at A$8.45 per share, 2.4% higher than the previous offer of A$8.25 a share, amounting to more than 9% premium to the stock’s closing price as of Friday.

On Monday, Sydney Airport’s shares were trading steadily.

A successful takeover would mark the biggest ever buyout of an Australian firm and underline a year of stellar deal activity. Australia has already seen a mega $29 billion buyout of Afterpay by Square.

A successful buyout would require Sydney Airport to get approval from shareholders, and the deal face regulatory scrutiny as well as be reviewed by the Foreign Investment Review Board These processes are likely to take months.

The unanimous decision by the board to reject the new deal comes after a month the airport operator turned down an initial bid from the Sydney Aviation Alliance (SAA), a consortium of Australian investors IFM Investors and QSuper and U.S.-based Global Infrastructure Partners.

Low interest rates have prompted pension funds and their investment managers to chase higher yields.

In a statement Sydney Airport said, AustralianSuper, Australia’s largest pension fund, has joined the consortium, in a move that could make it tougher for a rival offer to emerge given the requirement for 51% Australian control of the airport.

UniSuper, Sydney Airport’s biggest shareholder with a 15.3% stake, has indicated it is open to rolling that equity into an investment in the privatised company, as required as part of the bid conditions.

In a statement Sydney Airport said, its board was open to engaging with the Sydney Aviation Alliance provided the consortium lifts its indicative price “to appropriately recognise long term value for Sydney Airport securityholders.”

Both, AustralianSuper and SAA did not immediately respond to requests for comments.

“The critical thing is they (SAA) haven’t used ‘final’ and they haven’t walked away, so they continue to engage with each other,” said Ian Myles, a research analyst at Macquarie.

According to Macquarie’s analysts, given the high value of the property within Sydney Airport and low interest rates, a valuation of A$8.75 was within striking distance.

Incidentally, Sydney Airport is Australia’s only listed airport operator and any deal would essentially be a long-term bet on the travel sector which has been hammered by the coronavirus-induced COVID-19 pandemic.

Australia’s international border remains closed and Sydney is in its eighth week of lockdown after an outbreak of the Delta variant of COVID-19. Despite this scenario, investors and analysts believe there is scope for a higher price given the strong long-term outlook for the airport operator.

In a note, Credit Suisse analyst Paul Butler said, the low increase to the proposal price was “surprising”.

“The bidders either don’t see value at A$9 per share or think there is no urgency to get a deal done,” said Butler.

Sydney Airport is scheduled to report its first-half financial results later this week on Friday.

($1 = 1.3565 Australian dollars)

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