BAA plc rejects Goldman Sachs bid

BAA is the largest airport operator in the UK and Europe. In fact, the company has ownership interests in 13 airports outside of the UK including airports in the US, Australia, Italy and Hungary.

BAA controls Gatwick, Heathrow, Stansted, Glasgow, Edinburgh, Prestwick and Aberdeen hence accounting for 70% of UK's passenger traffic and 85% of air cargo. BAA also manages and controls the airport based retailing at these locations and operates a duty free operation.

The company had received back in February a conditional bid from a consortium led by Grupo Ferrovial S.A. which was rejected in March. They had bid 15.3 billion pounds.

Apparently, Goldman Sachs just had its 16.5 billion bid rejected.

Why the attraction? This is a highly profitable business with operating margins in the last twelve months of 34.8% compared to the prior year's 47.4%! Return on capital was fairly modest at around 4.5% last year. Debt to assets modest at 32%. Enterprise value of the business was 12 billion Br. pounds.

CFFO was 680 billion pounds for FY2005 (March) and was at 410 for the first half of 2006. Capital expenditures have been quite heavy in the last several years with capex of 741 for the first half of FY06, and 1.4 billion for 2005 and 1.3 billion for the previous year.

Under the current regulatory framework, allowed returns on capital for BAA are equal to the cost of capital. Consequently, there is ample desire to maintain capital efficiency and return capital to shareholders. Obviously, under a private equity ownership scheme, new owners could address the sale of various parts of the business and perhaps securitize some of the cash flow streams that the company enjoys.

This should help to reinforce the valuation of other airport operators globally. As well, given the US response to the Dubai ports takeover of P&O, this could be interesting to watch from a political standpoint.

Disclaimer: I, my family, and my clients do not have a current position in BAA.