ALUN FROST: Acsa investments in foreign airports fly between folly and wisdom

The recent announcement of an investigation into Telkom’s disastrous investment in Nigeria stimulated a reflection on lesser-known investments into Mumbai and Sao Paulo Airports by the Airports Company SA (Acsa).

As part of a consortium including Bidvest, Acsa acquired a 10% stake in Mumbai airport in 2006 and up to 2013 invested a cumulative R190m. In 2020 Acsa disposed of its Mumbai shareholding for R1.28bn — yielding a profit of R1.1bn. 

Acsa’s consortium won a concession to redevelop and manage the Mumbai airport for 30 years with a 30-year renewal option. Acsa was appointed as the airport operator.

Factors that contributed to a successful investment included:

• Acsa co-invested alongside Bidvest, other entities and financial institutions with no controlling shareholder in the consortium;
• It had sound executive leadership and board support when making the initial investment;
• The consortium secured a renewable 30-year concession, which allowed an extended period to generate a return on the initial capital investment and enhance exit valuations;
• Acsa’s role as operator appears to have been linked to the concession time period; and
• Mumbai experienced reasonable passenger growth during the investment period.

Acsa’s investment into Mumbai’s Chhatrapati Shivaji International Airport reflects the best of times and the age of wisdom. Sadly, this contrasts with its investment into Sao Paulo’s Guarulhos International Airport, which reflects the worst of times and the age of foolishness.

Acsa’s Brazilian misadventure stands in stark contrast to the Mumbai success. In February 2012, in a consortium with Invepar (a Brazilian conglomerate), it won the bid to redevelop and operate Sao Paulo airport for 20 years. Acsa acquired an effective 10% shareholding and a five-year operating licence.

It then invested R1.15bn into Sao Paulo from 2012 to 2020. In Acsa’s 2020 financial year the investment was fully impaired — that is, Acsa did not expect to be able to recoup anything from a sale of its 10% shareholding and had to bear a R1.15bn investment loss. 

When Acsa bid for the Sao Paulo concession in early 2012 its board comprised only three nonexecutive directors (with no airport operator experience), an acting CEO and an acting CFO. The factors contributing to Acsa’s disastrous Brazilian investment probably include:

• Overpaying to win the 20-year concession. Aviation Economics published a report comparing pricing on airport transactions from 1985 to 2015, which listed the Sao Paulo transaction as the most expensive on an enterprise value/earnings before interest, tax, depreciation & amortisation (ebitda) basis over the 30-year timespan. The implied enterprise value/ebitda multiple was 33 times, three times more than the 11.7 times paid by the minority shareholders who bought Acsa shares from the government in 1998; 
• Acsa holds only a 10% shareholding, while Invepar has the controlling stake;
• The consortium acquired only a 20-year concession with no extension arrangements. This is a relatively short time to rebuild an airport and then operate it profitably to extract sufficient returns through dividends;
• Acsa was appointed to operate the airport only for the first five years;
• Not even the 2014 Fifa Soccer World Cup and 2016 Summer Olympics could help Sao Paulo airport turn a profit in the 10 years since 2012;
• The inexperienced and barely quorate Acsa board, acting executives and inadequate oversight from the department of transport probably contributed to poor decision-making in approving the Sao Paulo investment. The transport minister is responsible for appointing Acsa’s board and the minister also ratifies the appointment of its CEO; and
• Until 2020 Acsa’s board and executives suffered from post-investment denial and presented conflicting reporting on Sao Paulo to stakeholders.

This denial and conflicting reporting warrants further explanation. In November 2015 Acsa’s chair stated that the company would generate a 19.7% per annum internal rate of return on its Sao Paulo investment. In January 2016 Acsa’s then CEO, Bongani Maseko, who initiated the Sao Paulo investment in 2012, filed an affidavit in the high court including a valuation of Acsa by an independent expert. 

The expert determined that Acsa’s Sao Paulo investment was worthless. In 2018 CFO Dirk Kunz filed an affidavit in the high court with a new expert valuation of Acsa. The valuer claimed that Acsa’s valuation of Sao Paulo was materially overstated. Ironically, both Maseko and Kunz supported and approved the Acsa 2015 and 2018 financial statements, which valued the Sao Paulo investment at R1.15bn, while simultaneously deposing contradictory affidavits that applied no value to the Sao Paulo investment.

In 2017, Acsa commissioned a reputable investment bank to value the Sao Paulo investment (ostensibly to justify not writing off the investment). Notwithstanding Sao Paulo’s significant losses and technical insolvency, the bank managed to find a rationale to support the R1.15bn investment cost, which I submit was wholly inappropriate in that it did not determine how Acsa would recoup its investment through future dividends. This also contradicted the expert valuations submitted to court in 2016 and 2018.

Finally, in Acsa’s 2020 financial statements the Sao Paulo investment was written down to zero from its R1,15bn cost by the current CEO and CFO, who obviously had no Sao Paulo baggage and no vested interest to defend.

Acsa’s 2021 financial statements note that it has agreed to sell its Sao Paulo investment but has declined to disclose the price. The board has been waiting for ministerial approval of the sale since April 2021. Knowing that ministerial decisions compete with glaciers for speed, we patiently wait to find out just how much Acsa’s Brazilian investment has cost shareholders.

In February 2021, the government invested R2.4bn in Acsa to prop up its balance sheet after losses incurred due to Covid-19. How sorely it has missed the R1.15bn wasted on Sao Paulo airport.

Hopefully our state-owned entities will pursue an age of wisdom by learning from Telkom and Acsa’s expensive mistakes, concentrate on sustainability and avoid depleting the public purse.

• Frost is an adviser to Acsa minority shareholders who have been involved in litigation with the transport minister and Acsa since 2015, aimed at ensuring that minorities can exit Acsa at a fair value.