Edinburgh – the new Gatwick?

To the eyes of some observers, the measure of Global Infrastructure Partners’ (GIP) success with Edinburgh Airport, its latest investment, will be whether its operational prowess can compensate for a hefty purchase price.

The New York-based fund manager has, by many accounts, made a decent fist of changing the previously unfavourable perception of Gatwick Airport, the UK’s second-busiest airport after Heathrow. Since buying the airport in 2009, it has done so by tackling various causes of customer grievance, improving aspects such as parking, security and baggage handling as well as better connecting the airport’s terminals.

On the face of it, all this operational spadework will be needed given the £807.2 million (€987.1 million; $1.3 billion) that GIP has handed to UK airport operator BAA for Edinburgh. Although BAA was reluctant to sell – having been forced to do so by regulators – it is likely to be pleased with the price given initial analysts’ estimates of between £400 million and £600 million when the asset was first put up for sale.

Given what was a competitive auction process – with the likes of 3i, Carlyle Group and JPMorgan Asset Management all throwing their hats into the ring – it’s no surprise that the price paid attracted intense interest.

But not everyone views that price with scepticism. Constantinos Orphanides, of PwC’s airport valuations group, says: “Edinburgh Airport is an attractive asset which has demonstrated passenger traffic resilience and which offers further upside from commercial yield improvements. The reported £807m…deal implies an enterprise value to EBITDA transaction multiple of  close to 16.1x which is in line with what we’d expect for a high growth UK regional airport like Edinburgh.”

He also goes on to point out that the multiple is “well below the airport valuation multiples observed in their 2008 pre-recession peak”.

Furthermore, unlike other UK airports – including Gatwick and Heathrow – Edinburgh is not subject to a regulatory asset base (RAB). This means there are no limits imposed by the Civil Aviation Authority on the returns investors can make. “It’s very rare to get 100 per cent control over an unregulated, high-quality asset like this,” GIP partner Michael McGee told the Financial Times.

Ultimately, time will tell whether the price was justified or not – but given the nature of the asset, combined with GIP’s growing reputation for adding value, no one should assume otherwise just yet.