Heathrow: Ferrovial departure looks well timed

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Ask Londoners who enjoy travelling, and Heathrow will be among their pet peeves. Most have a story about lost baggage or delays. Yet, the congested travel hub is something of a trophy asset.

This is reflected in the £2.4bn that Saudi Arabia’s Public Investment Fund and French private equity group Ardian have bid for Ferrovial’s 25 per cent stake. Other Heathrow shareholders, which include the Qatar Investment Authority, Caisse de dépôt et placement du Québec and Singapore’s sovereign wealth fund GIC, can choose to keep their holdings, buy Ferrovial’s shares, or tag along and sell into the bid.

Ferrovial’s exit, after 17 years, is well timed. PIF and Ardian value Heathrow’s equity at £9.5bn. Add in the year-end net debt, which Mediobanca Research pencils in at £16.3bn, and the implied enterprise value is just shy of £26bn. 

That is a near-30 per cent premium to Heathrow’s regulated asset base. It is also about 13 times next year’s ebitda, projected to fall given the cut in regulated landing fees. Listed competitors travel at around 10 times. Vinci, which bought 50.1 per cent of Gatwick in 2018, paid more, but that was for a pre-pandemic majority purchase. Ardian and PIF might end up stuck at 25 per cent.

Ardian targets mid-teen returns for infrastructure investments such as this one. That will not be easy to achieve. Assume, for the sake of argument, that over the next decade Heathrow increases its ebitda by 3 per cent a year and cuts interest costs gradually. Hold annual capital spending and tax steady at £800mn-£900mn. At an exit multiple of 12 times ebitda, Ardian could achieve an internal rate of return in the high single digits. 

True, this might well creep into the double digits should the new investors leverage their own investment. And there may be room to nudge up Heathrow’s cash flows. Analysis by Citigroup suggests that it underperforms on retail revenues compared with Zurich and ADP.

Lastly, none of these rough-and-ready numbers factors in the — increasingly remote — prospect of a third runway. Nevertheless, at this point, Ferrovial has extracted a good price for its holding.