Fairfax's Bangalore airport deal stuck

It’s been close to a year since India-born Canadian billionaire Prem Watsa's Fairfax signed an agreement to acquire a 33 per cent stake in the Bangalore International Airport Ltd (BIAL), but the deal is yet to be sealed as some issues remain unresolved.

Watsa, in a letter to the shareholders, has, however, said, “We are very excited about this investment.” The company is planning to acquire a total of 38 per cent stake for a consideration of $379 million from two stake holders.

In March 2016, Fairfax India agreed to purchase the stake in BIAL from GVK for $330 million, implying an equity value of around $1 billion for the whole company. Concurrently, the financial services firm, through a wholly-owned subsidiary, entered into a separate agreement to acquire additional five per cent equity from Zurich Airports’ interest in BIAL for $49 million.

Conditions, consents and approvals that remain outstanding primarily include finalising certain lending arrangements between GVK and its lenders, approval from certain government authorities, and receipt of a no-objection certificate from a relevant authorised dealer under the Foreign Exchange Management Act, 1999, with respect to permitting a pledge of shares in connection with the BIAL transaction, according to the report. In January this year, Watsa had met Prime Minister Narendra Modi, and later it was reported the BIAL clearance was at the PM’s table.

Fairfax India is permitted to complete up to two Indian investments, where such investments would be less than or equal to 25 per cent of the company's total assets. On January 13, the company received net proceeds of $493,504 from an underwritten public offering and private placements that resulted in an increase in the company's total assets and investment concentration restriction limit, thus providing ability to acquire up to a 38 per cent stake in BIAL.

Watsa said three potential sources of revenues for BIAL include aero revenue, non-aero revenue and real estate monetisation. Aero revenue has grown at 25 per cent per year over the last eight years. It is the revenue earned from airlines for providing services such as navigation, landing, take-off, parking, ground handling and ground safety. Rates for these individual services are fixed in a manner to get the airport operator a fixed 16 per cent per annum regulated return on invested equity. Under the hybrid-till approach, applicable to BIAL, 40 per cent of non-aero revenue is considered a part of aero revenue to compute the regulated return.

All other revenue sources are considered as non-aero revenue. This includes income from activities such as cargo handling, fuel sales, food and beverage sales and duty-free shops. BIAL takes an interest free-deposit from all the concessionaires and earns annual revenue on a minimum guarantee, revenue share or fixed rental basis. Non-aero revenue has grown at a CAGR of 16 per cent from 2009 to 2016 and is expected to grow substantially due to an increase in passenger growth rates, the availability of additional space and the increasing propensity of passengers to spend money.

BIAL also comes with 460 acres of excess land that can be monetised by the operator. So far, aside from building a hotel next to the airport and leasing it to the Taj Hotels Resorts and Palaces on a management contract, all other land is undeveloped. Bangalore's historical population areas are getting congested, hence the city is expanding in BIAL's direction. There will be significant upside, over time, from monetisation of this real estate, said Watsa.

BIAL owns and operates the Kempegowda International Airport Bengaluru (KIAB), under a 30+30 year concession agreement from the Government of India.