A deal that’s now up in the air

View of an airplane parked at an airport during sunset bright light shine and clouds in the sky.

IN May last year, this column took the view that the offer price for the proposed privatisation of Malaysia Airports Holdings Bhd (MAHB) by the consortium Gateway Development Alliance Sdn Bhd (GDA) was attractive, judging by historical standards, but may not be so when compared with regional peers.

At the same time, there were many positive factors that MAHB was riding on, including the soon-to-be-completed aerotrain project, the new baggage handling system, the extended concession period up to February 2069, and the new passenger service charge (PSC).

These factors made the offer on the table difficult to assess, as their implications have far-reaching consequences for both valuation and prospects.

The column also raised issues related to the need for privatisation as a public-listed company is not only more transparent and well-governed, but a stronger platform for any company to raise funds from the capital market, be it in the form of new equity issuance or even fixed income papers.

In addition, the merit of having a 30% stake in MAHB held by GIP Aurea Pte Ltd (GIP Aurea) seems misplaced as the key shareholders of GIP Aurea are GIP Aurea Holdco Pte Ltd (GIP AH) and Platinum Globe (PG), with an 83.33% and 16.67% stake in GIP Aurea, post-privatisation.

In essence, GIP AH will hold an effective 25% stake in MAHB, while PG, owned by the Abu Dhabi Investment Authority, will hold an effective 5% stake in the privatised MAHB.

Who is GIP?

This column views MAHB as an efficient airport operator, with more experience than is often attributed to it when compared to Global Infrastructure Partners (GIP).

GIP is indirectly wholly owned by various limited partnership vehicles, which are managed by Global Infrastructure Management (GIM).

According to the offer document for MAHB, GIP is a trading name for the funds ultimately managed or advised by GIM.

However, GIP’s experience in managing airports is rather limited.

It previously owned assets like the London Gatwick Airport and Edinburg Airport, and holds a minority stake in a consortium that manages Sydney Airport.

GIP bought Gatwick Airport in 2009 for £1.46bil and Edinburgh Airport in 2012 for £807mil.

It sold a 50.01% stake in Gatwick Airport for £2.9bil in 2018 and a similar block in Edinburgh Airport for £1.27bil last year in a deal valued at about 20.5 times enterprise value (EV) over earnings before interest, tax, depreciation and amortisation (Ebitda).

As for Sydney Airport, GIP was part of a consortium that bought out the other stakeholders in a deal valued at A$23.6bil, with an EV of A$32bil.

This was a top-end valuation, approximately 24.2 times of Sydney’s EV/Ebitda for 2019.

Sydney Airport ‘s passenger traffic is rather stagnant, with some 30.4 million passengers handled in the first nine months of 2024 (9M24).

It reported an Ebitda of A$1.19bil in 2023 and served some 38.6 million passengers then.

Not just one airport

Buying a stake in MAHB is not just about buying one airport known as Kuala Lumpur International Airport (KLIA).

MAHB serves 39 airports across Malaysia, as well as the main international airport in Turkiye.

In 9M24, MAHB handled nearly 70 million passengers, while its Turkish operations managed about 31.4 million passengers.

With a combined total of 101.4 million passengers in 9M24, MAHB is more than three times larger than Sydney Airport.

However, in terms of profitability, MAHB’s performance is lower, reporting an Ebitda of RM2.28bil in 2023 and RM2.07bil for 9M24.

It all boils down to valuation.

At the offer price of RM11 per share, MAHB is valued at approximately RM18.3bil in market capitalisation and RM21bil in total EV.

Based on its adjusted Ebitda of RM1.51bil for 2023, the deal is valued at 13.9 times EV/Ebitda.

The independent adviser to the deal reckons that the offer price is “not fair”, as it believes that the fair value is between RM12.61 and RM13.71, based on a sum-of-parts valuation.

This represents a premium of 2.8% to 19.8% above the offer price.

Nevertheless, the independent adviser reckons the deal is “reasonable”, as there is no competing or alternative offer on the table and the offer price represents a significant premium over the company’s net asset value and historical trading prices.Narrowing down the sum-of-parts valuation by the independent valuer, one cannot ignore the relatively low valuation of the agriculture landbank.

This primarily consists of buffer zones for future expansion, but it is also planted with income-yielding assets like oil palm trees and coconut.

The total agriculture leasehold landbank, expiring in February 2069 and measuring some 10,928 acres (of which 8,312 acres are in KLIA), was valued at only RM132.8mil, or RM12,153 per acre.

The resulting revaluation surplus from all the agro-based landbank was just RM77.5mil.

Additionally, the off-terminal development segment, which comprises KLIA Aeropolis (7,303 acres), Aeropolis Support Zone (789 acres), and the Subang Airport off-terminal landbank (almost 112 acres), was valued at only RM5.49bil.

KLIA Aeropolis was valued at RM4.63bil, or RM14.55 per sq ft, while the Subang Airport plot was valued at RM78.60 per sq ft.

INEDs differ

The board of MAHB comprises six non-independent non-executive directors (NINEDs), five independent non-executive directors (INEDs), and one managing director (MD).

The MD is a Ministry of Finance Inc (MoF) appointee and a former MD of UEM Group, a unit of Khazanah Nasional Bhd, which is part of the consortium making this voluntary take-over offer.

There is also another NINED, who is an alternate director to one of the NINEDs.

Of the six NINEDs, four are nominee directors appointed by MoF, while the other two are nominee directors appointed by Khazanah, a party acting in concert with the joint offerer, and the Employees Provident Fund (EPF), which is one of the joint ultimate offerers, respectively.

The MD, although appointed by MoF, is also in essence from Khazanah. Based on the information provided by the offer document, the interested directors have abstained and will continue to abstain from deliberations and making any recommendations in relation to the offer.

However, the INEDs, having considered the terms and conditions of the offer, concluded that the RM11 per share offer price is “not fair” and “not reasonable”, recommending that shareholders reject the offer.

The INEDs also commented that they have not been privy to the full details of the joint offerers’ plans for MAHB, and hence were not able to conduct a comprehensive review and ascertain the projected outcomes of any plans that the offerers may have.

The INEDs concluded that the offer is not reasonable based on several factors, including the strategic plans in place to drive MAHB’s traffic growth, increased connectivity, positive results from the commercial reset and rejuvenation programme, and the environmental, social, and governance (ESG) initiatives undertaken.

Additionally, the improved connectivity and passenger experience at Istanbul Airport were considered.

One INED took the view that the strategies outlined by the joint offerers are similar to MAHB’s current strategies.

Furthermore, as the operator of a national asset, MAHB deploys cross-subsidy to develop smaller airports, and its operating performance has been relatively strong.

A potential de-listing could also prevent MAHB from tapping into the equity market for fundraising purposes, whereas its listing status promotes transparency and good governance.

In addition, the INEDs appointed UBS AG Singapore Branch to assist them with the reasonableness assessment of MAHB’s fair value.

UBS arrived at an indicative fair value of between RM10.95 and RM13.15 per share, with most of the valuation above the offer price.

Time is of the essence

The RM11 per share offer will remain open for acceptance until 5pm on Wednesday, Jan 8, 2025, the first closing date, or such later date as the joint offerers may decide, provided it is at least two days before the closing date.

Additionally, the joint offerers may not revise the offer after Tuesday, Jan 21, 2025, the 46th day from the posting of the current offer.

Since the joint offerers already hold a 41.22% stake in MAHB, the offer is conditional upon receiving valid acceptances that will result in them holding not less than 90% of the total MAHB shares in circulation.

Whether this threshold will be achieved remains to be seen, especially on an offer that is not compelling enough for shareholders to accept.

A divided board?

Since the issuance of the offer document, the fact that GDA took a view that the independent directors “fail to take into consideration MAHB’s past performance and challenges it faces” suggests a division within the MAHB board.

As NINEDs are nominee directors of the MoF, Khazanah and the EPF, one wonders if the NINEDs share GDA’s opinion but are unable to express themselves due to potential conflicts of interest.

Another interesting point is that MAHB, being a large market capitalisation company, does not have a majority of INEDs, which is a departure from the Malaysian Code of Corporate Governance (MCCG).

The composition of the board is skewed towards NINEDs, who represent 50% of the board members, excluding the MD.

While MAHB’s constitution spells out the rights of the Special Shareholder, in this case is the MoF, which can appoint up to six government directors, MAHB should strive to meet the objective of the MCCG by ensuring INEDs make up the majority of its board.

Discount to RM11

With just days remaining until the offer closes, MAHB’s share price was last seen trading at RM10.54 per share, approximately a 4.2% discount to the offer price.

In normal circumstances, the share price of a company subject to a takeover would likely narrow the discount considerably, as investors would price in expectations that the offer will succeed.

The key question now is whether the shareholders, holding at least the remaining 58.78% stake, are convinced that GDA’s proposal is good enough, or whether they should wait for a better offer or hope that MAHB will be re-rated by the market based on its strong operational performance.

A successful privatisation of MAHB would remove a company with a total market capitalisation of RM17.6bil, presently ranked as the 30th largest company on Bursa Malaysia.

MAHB was also a constituent of the FBM KLCI, having been included in the June 2018 review before being removed two years later, as its share price fell as a result of dented demand due to the pandemic.

Another key reason for keeping MAHB listed on Bursa Malaysia is its exposure to the travel and tourism sector.

Investors tend to value airport businesses more than airlines, as airlines are often more unpredictable due to factors like competition and fluctuations in oil prices.

MAHB represents an opportunity for investors to ride on both inbound and outbound travel, as seen in the steady and strong growth in passenger numbers post-pandemic.

At the current price of RM10.54, MAHB is trading at just 7.2 times EV/Ebitda, based on its annualised Ebitda of RM2.75bil for financial year 2024.

Shareholders should either reject the offer or wait for GDA to give them an offer they cannot say no to, especially if the valuation matrix is raised to more than 20 times EV/Ebitda, which aligns with Gatwick Airport’s valuation last year and is still at a discount to Sydney Airport’s valuation.

After all, previous takeover offers and privatisations via selective capital repayment exercises, such as those of Cycle & Carriage Bintang Bhd and Selangor Properties Sdn Bhd, have seen offer prices raised after objections from minority shareholders.

GDA should up the offer price if it wants this voluntary take-over offer to succeed.

Otherwise, this will likely be just a raw deal that has turned sour for shareholders.