BAA fights to keep debt reduction strategy on track after planned airport sale left with only one potential buyer

BAA is fighting to keep its debt reduction plans on track after the planned sale of Gatwick airport, a key option in curbing borrowings of around £12bn, was left with only one would-be buyer following the withdrawal of a consortium led by Manchester Airports Group (MAG).

MAG pulled out of the bidding yesterday after refusing to meet BAA’s final price of £1.5bn – £100m more than the owner of Manchester airport was willing to offer. The departure of MAG leaves BAA dependent on one suitor whose involvement in the process has been shrouded in uncertainty for months.

The US-based investment fund Global Infrastructure Partners (GIP) remains interested in Gatwick, but it is not known whether it is in formal talks with BAA. It was angered by the airport group’s decision in May to appeal a Competition Commission ruling that it must sell Gatwick, Stansted and either Glasgow or Edinburgh airports over the next two years.

BAA’s new price tag of £1.5bn could be a block as well, with GIP’s offer believed to be in the same range as the MAG consortium, which includes Canadian infrastructure investor Borealis.

The Gatwick sale is a key plank in BAA’s drive to whittle down debts of around £9.5bn that are secured against its London airports, including Heathrow. A £4.4bn refinancing facility within the debt structure created to house BAA’s London assets, BAA (SP), requires payments of £1bn a year up to 2013. The first payment is due in March next year and BAA has earmarked the proceeds from the Gatwick sale for that purpose.

Failure to sell Gatwick by March next year will leave BAA with the option of raising new debt in order to meet the payment schedule. BAA is saddled with total borrowings of around £12bn after a consortium led by Ferrovial, the Spanish infrastructure group, loaded the business with debt in order to finance its acquisition for £10.3bn in 2006.

However, the option of raising new debt is also shrouded in doubt because the government has proposed a “special administration” regime which, in the event of BAA going bust, would give ministers powers over the group’s airports. BAA’s creditors have expressed concerns over proposals that would deny them the right to sell Heathrow in order to recover their loans.

In a submission to the Department for Transport last month, BAA indicated that the credit market was alarmed by the plans. It said: “Creditors have indicated that certain of the reforms would, if implemented in their current form, adversely affect their existing rights and materially shift the balance of risk and reward from the basis upon which they invested.”

Douglas McNeill, analyst at Astaire Securities, said BAA’s hopes of raising £1.5bn would be damaged by the withdrawal of MAG. “Selling Gatwick is an important part of BAA’s debt reduction plan, and it needs to keep as many bidders as possible interested in order to maximise price,” he said.

BAA’s valuation of Gatwick is underpinned by a formula called the regulatory asset base – or RAB – which gives the airport a value of just under £1.6bn. BAA had initially targeted a sale at a premium to the RAB price, but it is becoming increasingly likely that it will have to settle for around £1.4bn or scrap the sale process entirely.

BAA said it would not comment on the bidding process in public. However, one source close to the discussions said MAG’s exit could be a negotiating tactic to force BAA into accepting a bid of around £1.4bn. MAG declined to comment but it is understood the consortium is still interested in Gatwick, albeit at a lower price.

BAA is expected to cite the protracted sale process, launched in September last year, when it attends an appeal tribunal against the Competition Commission ruling in October. Colin Matthews, BAA’s chief executive, described the imposition of a partial break-up as “flawed” earlier this year and indicated that the group might struggle to sell three airports by the middle of 2011.

“Two years suggests a long time but it is not necessarily a long time to complete three transactions in a difficult market environment,” he said.

The tribunal is expected to deliver its verdict before Christmas.