Infrastructure: Gatwick's terminal congestion

Gatwick sale: BAA is selling two yeas after it bought at the height of the market

The chance to get its hands on Gatwick is a rare one for any bidder, and interest in the sale is likely to be ferocious. Indeed, Fraport (which owns Frankfurt airport), Dubai Aerospace, Deutsche Bank’s RREEF infrastructure fund, Virgin Atlantic and EasyJet have all been linked to potential bids for the airport. But more than ever before, the outcome will be determined by one thing: who can raise the finance.

BAA is understood to be looking for £2.5 billion ($3.8 billion) for the airport – and will want to complete the sale before the Competition Commission completes its review and turns it into a forced seller.

"The debt markets are closed for many other asset classes but they are not closed for infrastructure," says Mark Crosbie, managing partner at Antin Infrastructure Partners, the BNP Paribas-backed infrastructure fund launched last month. He points to the recent sale of Porterbrook Leasing by Abbey to a consortium of Deutsche Bank, Lloyds and Antin itself. The rail leasing firm was reportedly sold for £1.4 billion. "This was very large transaction that was held together in the eye of the storm," says Crosbie. "We were concerned about whether we would be able to hold the deal together, but at no point did any bank want to walk away."

BAA is having to sell Gatwick just two years after it bought it at the height of the market. Its own cost of capital has also rocketed. "Utilities have been able to fund at Libor plus 70bp all-in. They are now looking at a cost of debt of around 8%," notes a fixed-income expert. "However, if they priced Gatwick Airport at a yield to equity of 25%, they could still pay out 10% on the debt," he reckons. But Crosbie is concerned that the level of interest in the sale will distort the returns available. "We are highly unlikely to bid for Gatwick," he reveals. "I am sure we will see people bidding the return away."

But infrastructure assets are one area where future opportunities should not be scarce. "Infrastructure spend will grow 8% per annum for the next 25 years in the EU 27," predicts Alain Raucher, chief executive at Antin Infrastructure Partners. Infrastructure funds in Europe have tended to focus on the UK as that is where the low-hanging fruit has been. But Antin plans to focus primarily on continental Europe and believes that its BNP Paribas backing will be a strong asset. "In continental Europe price isn’t always the biggest determinant of who wins the deal – you have to be able to leverage off a pan-European platform," says Crosbie. He adds that the €300 million that BNP Paribas has invested in Antin (for a 40% stake) is the single-largest investment that the French bank has ever made in backing individuals (a standalone fund).

Deutsche Bank established its €2 billion RREEF fund to target European infrastructure in August 2007 and many more such funds are likely to emerge as investors reallocate funds from sectors such as real estate and private equity to infrastructure. "Investors are defining pockets of investment for infrastructure," says Crosbie at Antin. "People that invested in very frothy markets and overpaid are now having to sell assets and there will be a lot of public money going in to infrastructure projects. Because of this there will still be a need to recycle capital. We see this as an opportunity to invest in existing assets that will have to be sold in order to free up capacity for new projects. The capital expenditures are so huge that the public sector will have to sell assets." He also emphasizes that the illiquid nature of the debt market will not prevent this business going ahead. "We see the credit crunch as an opportunity rather than a threat. We are factoring in today’s debt market in our investment cases – if we can build an investment case based on today’s market then there is clearly significant potential upside." Antin was due to announce its third acquisition at the end of November.