Debt warning over airports takeover bid

The Civil Aviation Authority indicated today that it would take a dim view of any takeover bid for airports operator BAA using large amounts of debt.

Responding to interest in BAA from Spanish infrastructure firm Grupo Ferrovial, the airports watchdog said its powers allowed it to refer a takeover bid to the Competition Commission if it was not seen to be in the public interest.

The CAA also stressed that it was not prepared to raise caps on airport charges so that any bidder could generate enough cash to pay back loans taken out during a takeover.

This was important as significant sums would have to be spent on upgrading facilities at Heathrow, Gatwick and Stansted airports in coming years to “accommodate a continuing increase in the demand for air travel in the south east of England”, the watchdog explained.

The CAA said: “This is likely to require the maintenance of credit quality sufficient to ensure the cost-effective financing of future investment.”

A report in the Independent newspaper yesterday said Ferrovial would face the additional burden of having to take on £8.5bn (€12.5bn) of debt if it won control of BAA.

This is because a recent bond issue by BAA could drive its debt-to-equity ratio up to 108% once the construction of Terminal 5 at Heathrow is completed in 2008/09.

According to the Independent report, an offer of 900p a share by Ferrovial would mean that the cost of acquiring the business and taking on its debt would exceed £18bn (€26.4bn).

Further expenditure was likely as BAA is planning to spend £2.2bn (€3.2bn) initially on a second runway at Stansted, while it is also mulling over a £1.5bn (€2.2bn) outlay on a new terminal dubbed Heathrow East.

The CAA said the 1986 Airports Act meant it was duty-bound to consider whether any airport operator was acting in the public interest and this included its financial arrangements.

Any doubts would see the CAA refer the case to the Competition Commission, which could ultimately lead to it imposing conditions on the airports operator.

The CAA is currently conducting a review of caps on airport charges at Heathrow, Gatwick and Stansted for the period 2008/13.

It is expected that Ferrovial, which already owns Belfast City airport and half of Bristol airport, will seek partners before launching any bid for BAA.

Parties interested in joining forces with Ferrovial or even launching their own bid are thought to include private equity firm Star Capital Partners, the Singapore government, Australian bank Macquarie and Canadian fund manager Caisse de Depot et Placement du Quebec.