Sydney Airport offloads baggage
Recommendation
In Sydney Airport takes the cake on 20 May 13 (Buy – $3.75) we wrote that the airport offered an attractive combination of income and growth, ‘and a slice of irritation’. So we’re delighted to see it taking steps to remove two large chunks of that irritation – the complexity of the group’s structure and the associated wranglings with the ATO.
Key Points
- SYD to move to full ownership of underlying airport.
- Structure to be simplified.
- Agreement reached with ATO over dispute.
To simplify the structure, the listed vehicle (SYD) will move from 84.8% to 100% ownership, by issuing securities to the investors that own the missing 15.2%. The securities will be issued pro rata, so the net effect is that if you own a millionth of the underlying airport now (equivalent to a stake of $7,900), then you’ll also own a millionth of the airport after the transaction.
A couple of the minority investors in the airport don’t want securities in SYD, so their securities (about 3.9% of the total) are being placed with institutions and the stock has gone into a trading halt temporarily to accomplish this.
ATO not unhappy
It's all music to our ears and we’re guessing that the ATO will also be not unhappy (that's probably as good as it gets for the ATO), because the new 100% ownership structure means SYD can do away with the redeemable preference shares it didn’t like. The transactions are not expected to impact SYD’s overall tax situation, though, are most analysts are still expecting that SYD won’t pay any tax until about 2020.
An in-principle agreement has also been reached over past tax returns, with SYD expecting to pay $69m in settlement of the ATO's claims, although the final amount will be determined by a ruling expected to be handed down in the fourth quarter of the current year. The simplification will also not be finalised until the fourth quarter, because a couple of securityholder meetings need to take place to approve it all.
The $69m payment to the ATO and the $54m transaction costs are expected to be met initially by a distribution reinvestment plan, but the possibility of a small fundraising was left open. We’re not particularly fussed, except that (as ever) we’d prefer to see less debt rather than more and we’d like to see the cheapest approach taken to achieve that (for example we’d rather see the distribution cancelled than an underwritten DRP).
Guidance for this year’s distribution has been maintained at 22.5 cents and we'll have a better idea of the underlying performance when the company reports half-year results on 22 August. The stock is up 6% since 28 June 13 (Buy – $3.40). BUY.
Note: Our Growth and Income portfolios own securities in Sydney AIrport.