Bidders Seen Overpaying at Brazil Airport Auction Leaves Losers as Winners

Some of the world’s biggest airport operators came away empty-handed after Brazil auctioned licenses to run three of its busiest hubs. With the concessions fetching five times the minimum bid, their caution may have been wise.

Brazilian contractors teamed up with companies in Argentina, France and South Africa to bid 24.5 billion reais ($14 billion) yesterday for leases to Sao Paulo’s Guarulhos international airport and two other facilities. The auction marked an about-face for President Dilma Rousseff’s Workers’ Party, which abandoned its opposition to private investment in the country’s airports as Brazil struggles to upgrade aging terminals in time for the 2014 World Cup.

Shares in the only listed company among the winners, TPI - Triunfo Participacoes e Investimentos, fell as investors saw the premium it offered to pay as too high, while the leaders of two losing consortiums rose. Groups including Flughafen Zuerich AG (FHZN), Fraport AG Frankfurt Airport Services Worldwide (FRA) and operators of London’s Heathrow and Singapore’s airport were also outbid.

“They certainly overpaid, particularly for Guarulhos, well beyond what can be considered fair value,” Daniela Bretthauer, an equities analyst with Raymond James, said by telephone from Sao Paulo.

Rousseff’s government was seeking to raise a minimum of 5.5 billion reais from the auction for the rights to operate the three airports that last year accounted for about a third of Brazil’s 179 million passengers last year and 57 percent of its air cargo.

Political Pressure

Investimentos e Participacoes em Infra-Estrutura SA teamed up with Airports Co. South Africa to bid 16.2 billion reais for a 20-year lease of Guarulhos. That’s almost 4 billion reais more than the second-highest bid by a group that included Fraport, operator of Frankfurt’s airport, the world’s ninth busiest, according to the Montreal-based Airport Council International.

The dominance in the Invepar consortium of employee pension funds linked to state-run companies also raises concern over potential government meddling in the airport’s management, said Mauro Rochlin, professor of economics at the IBMEC business school in Rio de Janeiro.

Rousseff has vowed to keep a safe distance from the airports’ management, and yesterday’s auction was Brazil’s boldest attempt at privatization since the 1990s, when it sold off roads and utilities that suffered from decades of underinvestment. Still, the state will maintain a 49 percent stake in each consortium and via loans from state development bank BNDES will fund much of the improvements.

“The question is how much political pressure the new operators will face,” Rochlin said by telephone.

High Premiums

Sao Paulo-based Engevix Engenharia SA and Corporacion America, which operates Argentina’s airports, offered the biggest premium -- more than seven times the 582 million reais minimum bid -- to run the airport in the capital Brasilia for 25 years. The two companies are building an airport near the northeastern city of Natal after winning last year Brazil’s first attempt to attract private investors to the industry.

Shares in Triunfo, which together with Paris-based Egis Avia offered 3.8 billion reais to run Viracopos near Sao Paulo for 30 years, fell 3.3 percent yesterday. In contrast, losing bidders CCR SA and Obrascon Huarte Lain Brasil SA (OHLB3), both of them Sao Paulo-based builders, rose 2.5 percent and 5.3 percent respectively as the benchmark Bovespa index remained flat.

“It removed a heavy weight off the stocks,” Victor Mizusaki, a transportation equities analyst at UBS AG in Sao Paulo, said about the losing bidders. “The market was worried about what would be the returns if they had won.”

Losing Bidders

Madrid-based Ferrovial SA (FER), which owns the company operating Heathrow, and Changi Airport Group, which manages Singapore’s main airport as well as projects in China and Europe, made losing bids through eight other groups.

Company spokesmen from Invepar, Engevix and Triunfo declined to comment when contacted by Bloomberg News, while Johannesburg-based ACSA didn’t respond to messages seeking comment. Egis Avia couldn’t be reached after market hours.

Investments in Brazil’s aging airports have struggled to keep pace with air travel that has doubled in the past decade as incomes in Latin America’s biggest economy have risen. Last year, as the world’s fifth-biggest country by land mass trailed only the U.S. and China in volume of domestic air travel, 1 of 20 flights were canceled compared with 1 in 50 in the U.S.

To put an end to crowded hallways and busted escalators, the winning operators are required to invest a total of 16.1 billion reais in the three airports, including building a new terminal in Guarulhos to handle 7 million passengers a year. The government is also weighing the possibility of leasing Rio de Janeiro’s international airport and other travel hubs expected to see a surge in traffic.

“Today’s auction was an important first step but still insufficient,” Robson Andrade, head of the National Industry Confederation, said in a telephone interview from Sao Paulo. “More needs to be done to stimulate private sector participation. There are many airports that require heavy investments.”

To contact the reporters on this story: Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net; Jose Sergio Osse in Sao Paulo at josse1@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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