Buying Cinderella

Cezary Podkul breaks down Citi Infrastructure Investors’ $2.5bn all-equity bid for Chicago’s Midway airport.

It's five years since Chicago’s Mayor, Richard Daley, broke a champagne bottle over a model of the city’s Midway Airport to celebrate the completion its $927 million re-development programme. But his toast is as true today as it was then: “I once called Midway the comeback kid of airports. As I look around today, Midway’s story seems more like Cinderella’s – once taken for granted and a little shabby, now attractive and ready to move into the future.”

In September 2008, a consortium led by Citi Infrastructure Investors decided it was attractive enough to be worth $2.5 billion dollars – at least $700 million more than its closest competitor thought – in a deal that could turn Citi into the Prince Charming not only to Chicago but also to airport investors everywhere.

Midway Airport

First, Citi’s partnership with Vancouver Airport Authority – the secret source that allowed it to outbid Morgan Stanley, Goldman Sachs and Macquarie – has become the loudest argument yet in favour of sourcing infrastructure assets through joint ventures with industry players. Second, if Citi successfully refinances the all- equity bid before financial close, it will give added credence to injecting equity into infrastructure deals when credit is tight. Most importantly, a happy ending to the Midway saga could open up the market by encouraging other cities to follow Chicago’s lead in privatising its airport.

“Midway is one of those deals where we are holding our breath and waiting for it to happen,” says Sotiris Pagdadis, senior strategic advisor at international aviation consultancy SH&E.


In America, it’s not unusual for infrastructure asset bids to come in scatter-shot. A long term lease for the Chicago Skyway fetched $1.8 billion in 2004, for example, but the second best bid was just $700 million. And in last year’s contest for the Pennsylvania Turnpike, there was a staggering $4 billion gap between the lowest and highest first-round bids.

Chicago has yet to disclose the price tags offered by all the bidders, but market speculation is Citi’s bid topped the runner up, Macquarie, by at least $700 million – which begs two questions: how did the Citi consortium get to $2.5 billion; and did they overpay? “We didn’t wake up the next day with any type of buyer’s remorse,” says George Casey, chief executive of Vancouver Airport Services, or YVRAS.

In May 2008, Citi bought a 50 percent stake in YVRAS from the Vancouver Airport Authority so that it had a platform for sourcing and analysing opportunities such as Midway. Casey said the business plan had two basic dimensions: long-term traffic growth and significant expansion and improvement of the airport’s retail facilities. On the traffic side, Casey’s team projected softer traffic over the first 18 months of operation because of the wobbly economy.

They wouldn’t share numbers, but the US’ Federal Aviation Authority (FAA) sees Midway growing from just over 9 million enplanements, or number of passengers boarding aircraft at an airport, in 2007 to 11.1 million in 2011.

Over the long term, Casey believes that Midway will return to growth. The FAA says that by 2025 the airport will enplane more than 19.6 million passengers a year. A key lever for growth, Casey says, is international traffic “which, as you look forward, is in the stated plans and objectives of the airlines serving the market” – namely Southwest Airlines, lessor of 29 of 43 landing gates at Midway and owner of 75 percent of the airport’s landed weight.

“We’ve been a domestic airline for 27 years. Eventually, we’d like to fly internationally but we haven’t selected the market yet. It will probably be in North America,” says Pete Houghton, Southwest’s director of properties and one of the negotiators for the airport’s 99-year concession and lease agreement.

Midway gained a customs facility in 2004, thanks to Mayor Daley’s expansion programme, and is already set up for international traffic. YVRAS, which manages 18 airports, including numerous locations in Canada and the Caribbean, sees this as a golden opportunity. “We can work with airlines like Southwest and others to bring them to those markets,” Casey says.

No matter how the traffic figures eventually pan out, there is an initial limit to the aeronautical revenues that MidCo, the special purpose entity the consortium created to run the airport, can hope to earn. Southwest led the charge to freeze landing fees, terminal rental fees and airline parking fees for the first six years of operation, after which they can only be increased at a rate indexed to inflation until 2033. Houghton estimates that the arrangement saves the airlines between $75 million and $100 million over the next 10 to 15 years on a discounted cashflow basis. For MidCo, it translates to an initial airline base contribution of $45 million per year, or just under a quarter of Midway’s 2007 revenues of $197 million.

Around $50 million of the remaining revenues comes from the airport’s concessions and retail offerings. Growth could be rapid. Casey says they will nearly double the area of Midway’s central commercial triangle, which houses eight shops and 12 restaurants. They will add more anchor stores. Other ideas will be imported from YVRAS’ flagship airport – Vancouver – such as valet parking, car rental facilities and maybe even a spa over the next six years.

“This is when experience comes to bear,” says Casey. “The benefit we bring to this transaction is that we operate a network of airports”.

Access to data helps too. Casey admits there was no “apples-to-apples” comparator for Midway. But by looking to Vancouver for valet parking, Nassau for mobile kiosks, and other YVRAS airports to justify its business plan, MidCo could create performance benchmarks that made Citi comfortable with offering $2.5 billion in cash for Midway – around 28 times earnings.


Now, it has to finance that huge commitment. As the credit crisis grew fiercer last summer, MidCo’s partners decided to give up on debt. Instead, they submitted their bid to the City of Chicago on an all-equity basis and decided to worry about refinancing later on.

This means that, unless they can find debt, Citi, YVRAS and a third partner, the John Hancock Life Insurance Company, will be 89 percent, 3 percent and 8 percent owners respectively of a much larger than expected equity tranche in MidCo.

It’s a risk, but going all-equity had a distinct advantage in the current credit climate. A source close to the deal says that the consortium did not want to put itself at the mercy of the banks. In recent months, as banks’ problems continued to worsen, some banks dramatically pulled their financial support for projects at the 11th hour – most notably in the bidding for the Chicago Parking Meters, where Barclays, a main lender across several consortia, withdrew financial support.

“I think the market buzz was that this was a really smart move,” Robert Collins, head of infrastructure mergers and acquisitions for Americas at Morgan Stanley, commented on the move during PEI’s Infrastructure Investor Forum in New York in October. Chances are that credit markets will improve, Collins said, in which case the consortium will likely be able to refinance their equity interest at very attractive rates.

Shareholder capital will comprise at least 50 percent of MidCo’s initial capital structure, according to MidCo, and they are reportedly seeking $800 million in debt.

So far so good: Chicago’s legal counsel, Mayer Brown, recently said the airport’s operations would be unaffected by bankruptcy. The city has several ways of protecting the public interest – including taking back the airport.

Others have since followed  Citi’s lead: the ultimate winner for Chicago’s parking meters, Morgan Stanley Infrastructure Partners, committed to pay the city $1.16 billion, all equity. The next great test is to refinance Midway, showing that infrastructure assets’ inherent strength and long-term cashflows are attractive enough to bid on with all-equity.


But the success of the Midway deal extends beyond the viability of its all-equity bid. If the airport is leased successfully, it will become the first major US airport to be transferred successfully to private hands under the FAA’s 1997 Airport Privatisation Pilot Programme.

Only one other airport has gone through the privatisation process in the US – New York’s Stewart International, which in 2000 was leased for 99 years to National Express, a British transport provider. But six years later, the concessionaire decided to quit airport management and eventually the state repurchased Stewart for $78.5 million – an experience that made many public sector officials wary of putting up their airports for sale.

“Stewart was an aberration. Its timing was very different and the market was not yet mature,” Pagdadis claims. Midway is the real litmus test for the Pilot Privatisation Programme, and he hopes its success will help crack open the US market.

Airports in Austin, Milwaukee and Kansas have also expressed interest in the programme. And in Minnesota, two Republican lawmakers are drafting legislation allowing the state’s capital to lease its airport, too.

That leaves just four spots to fill in the pilot programme, none of which can be a major hub airport. This means that the FAA would have to reevaluate the programme and expand it in order for another airport like Midway to come to market – something that is far from certain.

“There is no assurance that there will ever be another airport privatised, so it could be a once in a lifetime opportunity to do it,” says Mayer Brown’s John Schmidt, Chicago’s legal counsel on Midway.


September 16, 1997
FAA establishes Pilot Privatisation Programme, enabling the privatisation of US airports.

Late 2005
City of Chicago begins dialogue with Southwest Airlines and other carriers about privatising Midway

September 16, 2006
City of Chicago submits its preliminary application for programme participation to FAA.

October 3, 2006
FAA accepts Midway’s preliminary application. City of Chicago starts to negotiate concession and lease agreement with Midway’s tenant airlines.

February 13, 2008
City of Chicago solicits request for qualifications (RFQ) from interested firms

March 31, 2008
City of Chicago receives six responses to the RFQs:
• Abertis Infraestructuras with Babcock & Brown and GE Commercial Aviation Services
• Carlyle Infrastructure Partners
• Macquarie: Macquarie Capital, Macquarie Airports, Macquarie Infrastructure Partners, Macquarie Infrastructure Partners II
• AirPort GmbH and GS Global Infrastructure Partners I and HOCHTIEF AirPort Capital
• Midway Investment and Development Corporation (MidCo) – a consortium of Citi Infrastructure Investors, YVRAS and John Hancock Life Insurance Company
• Morgan Stanley Infrastructure Partners with Aeroports de Paris Management and HMSHost Corp.

September 30, 2008
MidCo selected to operate the airport under a 99-year lease. The $2.5 billion bid beat out competing offers from Macquarie, Morgan Stanley and Goldman Sachs by over $700 million.

October 8, 2008
Chicago City Council unanimously approves the deal.

This article first appeared in the April 2009 issue of Infrastructure Investor magazine.