History of BAA
9. The British Airports Authority was established
under the Airports Authority Act 1966, and was initially
responsible for the airports at Heathrow, Gatwick, Stansted and
Prestwick. In the early 1970s, the authority acquired Edinburgh,
Aberdeen and Glasgow airports. Twenty years after the first act,
the Airports Act 1986 was passed, which turned the British
Airways Authority into the holding company BAA plc.
BAA was privatised in 1987, and over the course of the 1990s sold
Prestwick and acquired Southampton airport. Figures from the CAA
show that BAA airports accounted for 53% of all commercial air
transport movements nationally, and 85% of movements in the London
area in 2006. The future
of BAA is therefore of central importance to the United Kingdom's
Takeover by Ferrovial
10. In March 2006, BAA were approached by a consortium
led by Ferrovial, an international construction group with a major
interest in transport infrastructure.
The first formal offer made by Ferrovial in April 2006 for 810
pence per share was rejected. A second offer of 900 pence was
made and rejected in May. Following negotiations between the board
of BAA and Ferrovial, an offer of 950.25 pence per share was made
by Ferrovial on 12 June and recommended to shareholders by the
BAA board four days later.
11. On 26 June 2006, the Ferrovial Consortium announced
that it had received acceptances with regard to 83% of BAA's issued
shares, and took control of BAA plc. Once 90% of the issued shares
had been acquired on 15 August, BAA plc was delisted from the
London Stock Exchange.
Debt and refinancing
12. Ferrovial's final price of 950.25 pence per share
(935 pence per ordinary share plus a 15.25 pence dividend) was
a 17% increase on its original offer, and 49% above the share
price prior to the takeover approaches becoming public.
The sale price valued BAA at £10.11bn. BAA needs to refinance
the debt that was placed on it by the acquisition and is expected
to do so once the regulatory settlement is finalised in March
2008. An article in the Financial Times described how BAA
plans to refinance its existing debt against Heathrow and Gatwick,
as well as borrowing against the value of those two airports.
It went on to speculate that:
The numbers, however, look worrying. Earnings before
interest, tax, depreciation and amortisation in 2008 are estimated
at £1.2bn, rising to £1.3bn by 2010. This is not enough
to fund interest costs, which should be in the order of £800m
annually, as well as capex [capital expenditure], which Collins
Stewart [a financial services group] estimates at an annual £1.4bn
for the next five years. So, either borrowing will rise significantly
more or BAA's capital structure will have to change.
13. The plans for refinancing are being delayed until
March because they depend in part upon the CAA's decision on the
level of charges that BAA will be able to make to the airlines.
When we questioned BAA's Chairman, Sir Nigel Rudd, about the rate
of return that Ferrovial will see on their investment, based on
the level of charges proposed by the CAA on 21 November, he said
that Ferrovial "have been genuinely surprised and shocked
by the reduction [of the estimate of the cost of capital at Heathrow]
from 7.75 per cent to 6.2 per cent in the present review."
Stephen Nelson, BAA's Chief Executive, explained that:
We would imagine that actually the risks of operating
and building out a runway, and indeed an airport of the kind of
Heathrow, are going up rather than down, but what that settlement
indicates is that the risks have gone substantially down, and
we do not accept that.
14. Ferrovial acquired BAA with the expectation that
it would make a worthwhile return on its investment. The premium
it paid, the reduction in the CAA's estimate of the cost of capital
affecting the price settlement up to 2013, and the uncertainty
resulting from that combination has led to speculation that the
amount that could be borrowed against the airports will reduce.
When we asked Sir Nigel Rudd what he thought had gone wrong, he
told us that Ferrovial "had that advice and the advice was
clearly wrong, because the rate which has been offered is far
lower than that advice".
The level of charges, and the process by which they are set, is
discussed in more detail in Chapter 3.
Our previous inquiries
15. In recent years, we and our predecessor committee
have held inquiries into Aviation,
the Work of the Civil Aviation Authority
and Passengers' Experiences of Air Travel.
Our opinion of BAA's position in the UK aviation sector has been
consistent, as has our proposal for a remedy. Our predecessor
committee wrote in 2003 that "it is ineffective and inappropriate
to have a single private sector operator controlling such a large
part of our aviation infrastructure [
] In our view it would
be more appropriate to break up its monopoly".
In our inquiry into the work of the CAA, we noted that "during
the course of our inquiry, a number of witnesses again raised
the monopoly issue [
] We remain of the opinion that the
BAA monopoly should be broken up".
Most recently, in our inquiry into passengers' experiences of
air travel, we "received little evidence pointing to benefits
from BAA remaining in its present state and we see no reason to
change the view of our predecessor Committees that BAA should
be broken up".
16. Breaking up the BAA group of airports is one
of two major options for change that we considered, the other
being the possibility of competition between terminals. There
is also competition from other international hubs.
The Competition Commission's current market inquiry
17. On 29 March 2007 the Office for Fair Trading
(OFT) made a reference to the Competition Commission for an investigation
into the supply of airport services in the United Kingdom. Under
section 131 of the Enterprise Act 2002, the OFT is able to make
a reference to the Commission if it:
has reasonable grounds for suspecting that any feature,
or combination of features, of a market in the United Kingdom
for goods or services prevents, restricts or distorts competition
in connection with the supply or acquisition of any goods or services
in the United Kingdom or a part of the United Kingdom.
18. The main issues identified by the Competition
Commission as relevant to their investigation are the regulatory
framework, the common ownership of airports by BAA and the restrictions
on development and capacity. These issues are central to our own
inquiry, and while we hope that the Commission will take our conclusions
and recommendations into account, we do not believe our report
will prejudice whatever conclusions it may come to. As at February
2008, the Commission hoped to publish its emerging thinking in
around April 2008, with provisional findings and remedies following
in August 2008 and a final report to be made in December 2008.
8 The apparent acronym has only historical meaning-'BAA'
does not, strictly speaking, stand for anything. Back
CAA, UK Airport Statistics 2006 (Annual), Table 3 (Aircraft Movements),
www.caa.co.uk/airportstatistics (latest figures available). Back
Airport Development and Investment Ltd. was formed by Ferrovial
Infraestructuras, S.A., Caisse de dépôt et placement
du Québec and GIC Special Investments PTE Ltd for the purpose
of acquiring BAA. Back
BAA, 'Recommended final offers document', Acquisition History,
12 June 2006, www.baa.com Back
'BAA finances', Financial Times, 9 November 2007, p 18 Back
Q 281 Back
Q 284 Back
Q 286 Back
Transport Committee, Sixth Report of Session 2002-03, Aviation,
HC 454-I Back
Transport Committee, Thirteenth Report of Session 2005-06, The
Work of the Civil Aviation Authority, HC 809 Back
Transport Committee, Eighth Report of Session 2006-07, Passengers'
Experiences of Air Travel, HC 435-I Back
Transport Committee, Aviation, HC 454-I, para 117 Back
Transport Committee, The Work of the Civil Aviation Authority,
HC 809, para 142 Back
Transport Committee, Passengers' Experiences of Air Travel,
HC 435-I, para 64 Back
Enterprise Act 2002, section 131 Back