Even $16.6 billion can’t buy an airport during the pandemic

Despite being floored by the pandemic and starved of overseas passengers, Sydney Airport this month drew a A$22.3 billion ($16.6 billion) takeover offer, a record for Australia and 42% higher than its market value at the time. It sounded too good to refuse, but with Covid muddying the waters, the airport on Thursday rejected the bid.

The crisis has spat out an array of beaten-up assets from airlines and airports to casinos and other tourism-dependent businesses for investors betting on a rebound. For boards assessing these takeover approaches however, uncertainty surrounding the strength of any recovery and longer-term prospects is making it harder to distinguish between attractive offers and ones that fall short. ​

Sydney Airport said the A$8.25-a-share offer from pension funds including IFM Investors was lower than the stock price before the pandemic and undervalued a “strategic and irreplaceable” asset. The airport’s shares were down 0.9% at A$7.73 at 1:43 p.m. local time.

“Sydney Airport is strongly positioned to deliver growth as vaccination rates increase and we move into the post-pandemic recovery period,” it said in a statement. The airport said it would only progress a deal that recognized “appropriate long-term value.”

In response, the bidding consortium said it was “surprised and disappointed.” It said any comparison with Sydney Airport’s share price before Covid-19 “is of limited relevance” given changes to the aviation market and the “challenging outlook.”

Global air travel, the profit engine of an overseas gateway like Sydney Airport, may not fully recover until 2023, according to the International Air Transport Association. Now even that forecast is uncertain as the delta variant of Covid-19 rages through key travel markets such as the U.K. and the U.S., as well as Sydney, which has extended its lockdown.

“It’s not an enviable position for boards to be in as they try and assess the company’s long-term outlook,” said John Ayoub, a fund manager at Wilson Asset Management, which owns Sydney Airport shares. “Boards are a lot more conservative given the uncertainty.”

The airport has been in the cross-hairs of the crisis since Australia’s government closed the international border in March 2020 and even barred its own citizens from leaving. The company swung to a A$145.6 million loss in 2020. The border is expected to remain shut until mid-2022 given Australia’s lagging vaccination program, extending the airport’s financial isolation.

The takeover offer was “opportunistic,” even if the premium was unusually high, said Hugh Dive, chief investment officer at Atlas Funds Management in Sydney. Bloomberg Intelligence analyst Denise Wong said the bid “may not reflect the long-term return opportunities for this long-duration, essential infrastructure.”

With many businesses in distress, companies are fielding an unprecedented volume of surprise takeover proposals, and deal volumes worldwide have climbed for four straight quarters. There have been 18 offers this year valued at a record $67 billion in Australia and New Zealand alone, according to data compiled by Bloomberg. Three of those were withdrawn or terminated.

Many companies have been reluctant to sell up in a period of economic uncertainty, or have stretched out their assessments of takeover proposals for months. Others have preferred to spin off assets to shareholders rather than risk giving away value to suitors just before a recovery buoys asset prices.

Australian casino operator Crown Resorts Ltd. is yet to give its view on a merger proposal from Star Entertainment Group Ltd. that was announced in May. Crown, which faces regulatory probes as well as a slump in overseas visitors, also took almost two months to reject a takeover approach from Blackstone Group Inc.

Just last week, Australian betting giant Tabcorp Holdings Ltd. opted to keep its wagering and gaming business, rebuffing bids from Apollo Global Management Inc. and U.K. bookmaker Entain Plc.

Legal concerns also cloud the Sydney bid. Australian law bars an entity owning more than 15% of the airport if it also owns 15% or more of Perth, Brisbane or Melbourne airports. IFM owns 25% of Melbourne airport and 20% of Brisbane’s.