Wellington Council’s possible airport sale is emboldened by Auckland Council’s premium-attracting airport sell down, and though the market is eager, analysts say the two airports are very different beasts.
Instead of its preferred option of offloading its entire stake, Auckland Council ended up selling just over a third of its shares in Auckland International Airport for $833 million towards reducing council debt.
Wellington City Council voted to explore selling its 34 percent stake in Wellington International Airport at its long-term planning meeting last week, having revealed the potential sale in the documentation for the meeting released the week before.
The rationale behind the proposed sale is, alongside the sale of ground leases, to diversify its investment portfolio through the creation of a perpetual insurance fund and increased liquidity so it can tap funds in case of a costly disaster such as an earthquake.
In March, Newsroom published a piece comparing the historical sale of government shares in Wellington Airport with the planned sale of all of Auckland Council’s airport shares.
Harking back to that 1990s sale of the Central Government’s 66 percent share in the capital airport to Infratil, Wellington Council had also looked to offload its holding back then.
Though not as dramatic as the government’s successful but coalition-dissolving sale, the council’s sale attempt included hefty consultation sessions and strong public opposition, with meetings described as having people hanging from the rafters.
Wellington City Council will be emboldened by Auckland’s sale on a couple of fronts.
Namely, that despite opposition, Auckland got a deal over the line. Seven percent wasn’t Mayor Wayne Brown’s preferred option of selling its full 18 percent, but it was a deal nevertheless.
The sale also addresses two key concerns in Wellington Council’s report – timing and buyer appetite.
Wellington Council appears to know this, saying there the market value for its stake was potentially higher than its book value of $278m.
Auckland Council managed to sell its shares at a premium to Auckland Airport’s price on the NZX.
This is further supported by the 2022 sale of Sydney Airport, which attracted a full valuation in selling to a consortium for AU$23.6b.
That history and the return of Winston Peters – who was a staunch opponent of the share sale and shortly after sacked from National/New Zealand First coalition government – was not lost on Jarden head of wealth management research John Norling, who expected it may have to be traversed at some stage.
Norling said Auckland’s history as a listed entity meant potential buyers were very familiar with it, whereas Wellington being privately held and 66 percent held by another party meant it would be looked at differently.
“There’s quite a good demand for infrastructure assets like airports, but there’s no doubt that Auckland Airport will be viewed as much more attractive than that and Wellington Airport,” Norling said.
The liquidity that comes with being listed on a stock exchange would have attracted a premium for Auckland, Norling said, but considering Infratil being NZX-listed, and Wellington Airport bonds trading on the NZX’s debt market already, he reckoned a listing as part of the council exit strategy wouldn’t be an impossibility.
Harbour Asset Management portfolio manager Shane Solly said infrastructure assets with a strong regulatory return base (being the actual aviation side of the business) and growth potential were in demand globally.
“I’d be surprised if this made the public market. My guess is that it will be snapped up by unlisted funds. Obviously Infratil has a meaningful stake already and we don’t know what their appetite is, but it will also appeal to other large infrastructure funds, sovereign wealth funds and pension funds.”
Solly said the amount the council ended up parting with would also influence pricing. “There’s a few unknown factors, but I’d imagine investment bankers will be getting inundated with people keen to have a look at it.”
Asked about the similarities of Auckland and Wellington, Forsyth Barr head of research Andy Bowley said non-international focused airports had lower risk profiles and arguably lower growth and return on capital. “Wellington doesn’t have the same kind of opportunity in its non-regulated airport till to generate returns like Auckland does, and that reflects the size and scale of Auckland’s international businesses verses Wellington’s international business.”
Blessing and a curse
Wellington City Councillor Tim Brown, who was a major component behind the airport sale and investment diversification, was chair of the Wellington Airport board until April last year.
Brown said the asset mix of Wellington Council and having fewer commercial property holdings was a blessing and a curse when it came to a sale, with the regulated side of airport asset bases having a higher value multiple than the rest of the business.
“So in a funny sort of way, that’s a plus for Wellington because more of its asset base is actually to do with the airport, as opposed to just commercial property.”
He said international passengers were “massively more lucrative” than domestic, which Wellington relies on and are also less affected by the bargaining power Air New Zealand holds over the domestic market.
Brown said he wouldn’t have raised the idea of selling the airport unless he was absolutely confident the market was in a place where the council would be able to get a full and fair value for its asset.
Wellington Council’s report said if a sale were decided on following consultation, it could sell some or all of its shareholding.
It put forward three options – retain ownership, sell a portion, or sell all.
Advantages given for retaining the airport include retaining dividend payments, which are expected to return to pre-Covid levels of about $13.1m annually, and keeping the option to sell in the future.
Disadvantages for keeping it include lost opportunities, its illiquidity and demands for further investment to fund development towards the airport’s 2040 masterplan.
Selling some of its holdings would allow it to diversify its investment portfolio while maintaining control over the airport and receiving dividend payments, but comes with many of the same disadvantages as maintaining its holding.
It found that selling its entire stake could be perceived as a loss of confidence in investment in Wellington.
Not about the money
Brown got interested in being a councillor through an interest in affordable housing and addressing high interest rates in New Zealand, which are extremely pricey because of its exposure to natural disasters.
On joining the council he saw the council had the same problem as other property owners and began pushing for the sale of the airport holding to seed the insurance fund.
He said over the past decade Wellington Council’s stake in the airport had experienced a 6.9 percent capital gain on book value and delivered $98.2m in dividends to Wellingtonians.
Brown said that represented an overall return on investment of 11.2 percent annually, which actually outshone a diversified investment fund (the Aspiring Fund) that he uses as an example, which generated a 9.7 percent return.
Though that doesn’t sound like a great endorsement of his plan, he says it’s not about the money, it’s about the council de-risking and having the ability to access funds if or when needed.