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Why Saudi Arabia and private equity have landed stakes in Heathrow

As Heathrow prepares for its rush of Christmas travellers, Europe’s busiest airport is embarking on a big shake-up of its ownership as Saudi Arabia’s Public Investment Fund and private equity firm Ardian take control of a chunk of the business.

At the end of last month, Spanish infrastructure group Ferrovial announced it would sell its remaining 25 per cent stake in Heathrow to Saudi Arabia’s PIF and French buyout group Ardian for £2.4bn.

But the deal has also raised the prospect that the two new shareholders could increase their stakes further. As part of the terms of Heathrow’s ownership structure, the other shareholders, including Canadian and Australian pension funds, the Qatar Investment Authority and the China Investment Corporation, have the right to sell their stakes to the PIF and Ardian at the same price.

The price Ferrovial achieved — which valued the airport’s equity at £9.5bn, with an enterprise value of just under £26bn — was seen as “very attractive” by some of the other shareholders and at least one of them would consider selling, according to a person familiar with their thinking.

But the person added there was no guarantee that the PIF or Ardian would agree to up their stakes. The two new investors are focused on the current deal — which will require approval from UK competition authorities — and there have been no talks with other shareholders yet, according to another person familiar with the deal.

The PIF, which has more than $700bn of assets, is focused on generating a return from the 10 per cent stake it is buying, according to a person familiar with the fund’s decision.

But at the same time, Saudi Arabia is making a concerted push into aviation and tourism to try to reduce its reliance on oil revenues. 

The PIF is planning, for example, to launch a new airline Riyadh Air, with a goal to fly to 100 destinations by 2030. A new six runway airport is also in the works and Saudi Arabia wants to attract 100mn visitors a year by the end of the decade.

Its Heathrow stake would give it a measure of influence over one of the world’s biggest airports.

“[Heathrow] is high profile . . . and the sovereign wealth funds like trophy assets,” said Robert Boyle, former director of strategy at IAG, the owner of Heathrow’s biggest airline British Airways. But he added that any long-term investor would also need to have “a reasonable assurance of a guaranteed return”.

The PIF and Ardian are investing in Heathrow just as it confronts challenges that did not exist when Ferrovial bought the British Airports Authority (BAA) — the then owner of Heathrow, Gatwick and several other UK airports — for £10.3bn in 2006.

Before the pandemic, Heathrow delivered steady returns to its shareholders, paying a total of £3.2bn in dividends between 2006 and 2020.

Since then, while other parts of the industry — notably airlines — have put the pandemic behind them and are now making record profits, Heathrow has been lossmaking since 2020, while the cost of servicing its £15.8bn of debt has risen with interest rates and regulators have prevented it from significantly increasing landing charges.

The airport had hoped that building a third runway — a plan that has been under discussion for 20 years — would be a significant source of growth. But with doubtful political backing, high inflation and growing scrutiny of the environmental consequences, this is no longer regarded as a viable option by many aviation industry executives.

Although nothing has been ruled out, Heathrow’s management is exploring less radical options, such as upgrading its terminals, to increase passenger numbers, according to people close to its thinking. About 80mn people used the airport over the past 12 months, close to pre-pandemic levels.

“The question is how you can [increase] passenger volumes where the limits on movements are unlikely to change,” said aviation analyst Chris Tarry.

“Buyers no doubt see a strategic value but that has to translate into a financial value, where past dividends are unlikely to be a guide to the future . . . Was the reason for Ferrovial’s sale the view that it had maxed out on its returns?”

Ferrovial’s exit ends a more than 10-year process in which it has gradually sold off its stake in Heathrow and some of its other airports, and focused on the toll roads it owns in North America, where it has more latitude to increase charges.

Ferrovial’s retreat from Heathrow over the past decade has ushered in a range of international investors. One board member of a large infrastructure investment group said the level of foreign ownership of UK assets reflects the fact that the UK “was an early privatiser” where overseas investors “cut their teeth”.

When Ferrovial took over BAA, airports were highly prized assets with plenty of potential growth. This perception that they were a “pot of gold” took a hit during the pandemic.

But they still offer attractive income streams and are benefiting from the travel industry’s resurgence over the past 18 months.

Javier Echave, Heathrow’s chief financial officer, said at the group’s most recent results that he hoped the business would return to profit this winter, following an “extraordinary” bounceback over the summer.

Industry executives said that even without a third runway, Heathrow remained an attractive asset. Its status as the UK’s only hub airport allows it to charge higher landing fees than many of its international competitors, giving its owners a reliable income stream.

“European aviation is a fundamentally lower growth environment these days,” said Boyle. “In that sense being the incumbent helps.”

The PIF, Ardian and Ferrovial declined to comment. 

Additional reporting by Gill Plimmer in London and Samer Al-Atrush in Riyadh.

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