Infrastructure in the U.s., once the finest in the world, is increasingly on shaky ground. While emerging-markets countries in Asia and the Middle East build cutting-edge cities, roads and airports seemingly overnight, American structures crumble and collapse, like the Mississippi River bridge in Minneapolis or the levees that failed to protect New Orleans from Hurricane Katrina. The American Society of Civil Engineers estimates that the U.S. needs to spend $1.6 trillion over the next five years on infrastructure renovations and improvements.
Unsurprisingly, the private equity sector, with lots of cash and few good investment prospects, sees these problems as an opportunity and is increasingly clamoring to get a piece of the infrastructure action. In September, for example, a private consortium led by Citigroup landed a $2.5 billion deal from the city of Chicago for control of Midway Airport. The Midway Investment and Development Corp., commonly known as Midco, a consortium of Citi Infrastructure Investors, Vancouver Airport Services and John Hancock Life Insurance Co., received a 99-year lease, pending Federal Aviation Administration approval, to operate the 85-year-old airport located on the southwest side of the city. Citi’s investment bank, which advised Midco on the deal, ranks fourth in infrastructure advisory banking revenue so far this year. That’s up from fifth place for the comparable period of 2007, according to Dealogic. The city of Chicago’s advisers include Credit Suisse Securities, which ranks first in infrastructure banking so far this year, up from fourth place at the same time last year.
Midway, once the busiest airport in the world, lost much of its status in the early 1960s following the construction of O’Hare International Airport across town. Today, according to the FAA, Midway ranks No. 27 in the U.S. in terms of traffic, primarily serving regional travelers interested in low-cost travel. The airport is under financial pressure too. In 2007, Midway had an operating loss of $46.5 million on revenue of $197 million, including operating income, investment income and grants. Historically, Midway “has been run as a smaller sibling of O’Hare,” says Felicity Gates, co-head of CII, which is raising a $5 billion fund.
Nonetheless, Midway has the sort of numbers that appeal to private equity buyers. It had positive cash flow of $53.6 million in 2007. And there’s room for growth by expanding travel service to more destinations and by boosting income from parking and retail concessions.
Last spring CII acquired half of YVRAS, which operates 18 airports, including the biggest in Chile, Cyprus and the Bahamas. YVRAS’s other owner, the Vancouver Airport Authority, operates Vancouver International Airport, whose great success and reputation offers some clues about Midway’s investment potential. Widely considered one of the best airports in North America, Vancouver offers a spa, valet parking, dry cleaning and a convenience store catering to arrivals. Shopping opportunities at the new Midway won’t be as upscale, but there will be a lot of them.
Gates says Midway, like infrastructure in general, is a long-term play. Private equity investors usually seek to cash out after three to five years. But Midco has “no current expectations of selling this asset,” Gates says. She declines to be more specific about financial terms of the deal, citing a confidentiality agreement with the city, but asserts that the return is likely to be somewhat higher than the returns on real estate and lower than those of private equity. Midco’s upside must come from consumers. It has promised the airlines that operate out of Midway that it will freeze fees for six years and cap them at core inflation rates for nearly two decades after that.
Even a modest return would be an achievement, given the state of the economy and the financial markets. With virtually all U.S. airports run by government entities, the Midway privatization is an experiment in operating one for profit, as is common abroad. “We should hopefully see more of these transactions done in the United States,” says Michael Froman, a partner with CII.
