Description

Flughafen Wien Aktiengesellschaft (VIE: FLU)

Report Date: 01/29/23

Author: CevdetC

Price: EUR 34.00

Price Target: EUR 26.30

Thesis

We propose a short position on Flughafen Wien with a two-month price target of EUR 26.30 (22.65% upside, 340.4% IRR). Our investment recommendation is based on three primary thesis points:

Company Description 

Flughafen Wien Aktiengesellschaft (“Flughafen Wien”) is a stock corporation listed on the Vienna Stock Exchange incorporated under the laws of Austria. Flughafen Wien operates the Vienna International Airport and holds participations in Malter Airport and Kosice Airport, transporting in total more than 39.5 million passengers in the year 2019. Due to the unprecedented Covid-19 crisis, this number has declined by approximately 75% to 9.7 million passengers in the year 2020 but has since started to recover and reached approximately 13.1 million passengers in the year 2021. In the year 2021, Flughafen Wien generated total revenues of EUR 407.0 million. In contrast, in the pre-Covid year 2019, it generated revenues of EUR 857.6 million. The company’s business activities are classified in five segments: Airport, Handling & Security Services, Retail & Properties, Malta and Other Segments.

The Airport segment engages in the operation and maintenance of all movement areas of the terminals, the facilities involved in passenger and baggage handling, as well as security controls for passengers and hand luggage at Vienna Airport. Another field of activity is the acquisition of new airlines in point-to-point traffic and transfers, and the associated increase in the number of destinations and flight frequencies.

The Handling & Security Services segment, as a ground and cargo handling agent, provides services at Vienna Airport for aircraft and passenger handling in scheduled, charter and general aviation traffic. In addition to ramp, cargo and passenger handling, this segment also includes the provision of security services, such as checks of passengers and hand luggage, as well as general aviation, which covers civil aviation with the exception of scheduled and charter flights.

The Retail and Properties segment offers services to passengers, users of parking facilities, hotel guests, conference participants, employees at the site, and meeters and greeters. Other contributions to income in addition to shopping and food & beverages include advertising revenue, parking and the rental of office and cargo space.

The Malta segment operates Malta Airport (Malta International Airport plc, MIA) and its direct investments (the MIA Group). In addition to traditional aviation services, the companies of the MIA Group also generate revenue from parking and the rental of retail and office space. Handling is performed by two external firms.

The Other segment offers technical and repair, energy supply and waste disposal, telecommunication and information technology, electromechanical and building, construction management, and consulting services. This segment additionally includes the investments recorded at equity, as well as investment holding companies with no operating activities that are not independently reportable.

Investor Composition 

At the time of publication of the Offer the shareholder structure of Flughafen Wien according to disclosures made under section 130 paragraph 1 Stock Exchange Act was as follows:

Image 1: Shareholder structure from takeover offer prospectus

NÖ Landes-Beteilihungs GmbH and Wien Holding GmbH are both state holdings, bringing the state  ownership of the company to 40%. This 40% stake cannot be tendered due to several federal and state laws in place (airport is considered vital infrastructure). The 10% stake owned by Flughafen Wien Mitarbeiterbeteiligung Privatstiftungis the employee trust of the company, and its stake can also not be tendered. IFM, the BidCo, owned a 40% stake in Flughafen Wien at the time of announcement of the takeover offer. None of the parties acting in concert with the Bidco hold any share in the Target, and, at the time of the publication of the offer, IFM appointed two of the ten members of the supervisory board of Flughafen Wien despite their 40% shareholding. The remaining 10% free float is the subject of the takeover offer by IFM. The majority of this free float is owned by retail investors and some by institutional investors. Activist hedge fund Petrus Advisors, have openly rejected the offer, stating “The offer will be rejected, because anyone who tenders their stake in the Vienna airport at 34 Euros has not understood the dynamics of the European travel market.” As of writing, 1.79% of the free float has already been tendered to IFM in the previous takeover period before the Austrian Takeover Commission approved the bid, increasing their total stake to 41.79% (8.21% remaining free float).

Takeover Offer Details

On Jun. 14, 2022, BidCo announced that it surpassed its shareholding threshold of 40% in Flughafen Wien, triggering a mandatory takeover offer of EUR 33.00 per share cum dividend, with a historical dividend around EUR 0.80 (EUR 0.89 in 2019, no dividend in the past two years due to the pandemic). The tender offer applies for the acquisition of up to 8,399,990 ordinary shares, which are trading in the “Prime Segment” of the Vienna Stock Exchange. The shares represent 10% minus ten shares of Flughafen Wien’s registered capital which if accepted would take IFM’s stake up to 49.99% of Flughafen Wien . The acceptance period of the offer was originally from Aug. 11, 2022 to Oct. 6, 2022 but faced regulatory delays due to the airport being vital infrastructure. On Jan. 12, 2023, the IFM improved its takeover price to EUR 34 per share cum dividend. Then on Jan. 24, 2023, the Austrian Takeover Commission gave IFM approval for the takeover of this vital national infrastructure under a number of conditions, among others restricting IFM’s representation in the supervisory board to two out of ten representatives preventing IFM’s control of the company. Due to the approval of the Austrian Takeover Commission, the extended acceptance period is now from Jan. 26, 2022, to Feb. 8, 2022. Management of Flughafen Wien has repeatedly expressed its opposition to the takeover due to the unattractive price.

Image 2: Chart of key events of current takeover situation (2022/2023) marked on Flughafen Wien chart 

History

Flughafen Wien has received several tender offers for minority interests in the past, with the two most recent offers both being from IFM (2014 for 10% and 2016 for additional 20% of the shares outstanding). In both cases, the share price shot up and remained elevated for an extended period. In 2016, in particular, stock price remained elevated until a conflict with Turkey and a subsequent cyberattack by Turkish nationalists brought the stock briefly back to alignment with the European transportation index. While these two cases may suggest that Flughafen’s stock jump is permanent, the previous offers coincided with periods of stock price growth across the board in European airports (Paris, Frankfurt, etc.). Here, Flughafen Wien’s price is untethered to market performance. Additionally, after both offers, investors anticipated IFM to make further offers for Flughafen Wien, pushing the stock higher. This is not the case in the current situation which is why the previous two offers are not comparable with the latest one. 

Image 3: 2022/2023 Takeover Situation - Chart Flughafen Wien (blue) and S&P Transportation Index (orange)

Image 4: 2016 Takeover Situation - Chart of Flughafen Wien (blue) and S&P Transportation Index (orange) 

A more comparable situation is that of S Immo, a position that our partners approved in the fall. There, too, a takeover offer brought an Austrian company’s stock price to a level that was similarly untethered to fundamentals. In that case, we would have realized a 46.1% return in one month if not for implementation difficulties. Additionally, the situation at Immofinanz, which was described in our S Immo pitch is an example for this same approach. 

Image 5: 2022 Takeover Situation at Immofinanz - Chart showing price action after end of takeover offer period

Image 6: 2022 Takeover Situation at S Immo (last pitch) - Chart showing price action after end of takeover offer

European Airport Sector

The European airport industry can be generally characterized as an oligopoly market structure / regional monopolies, with a few large firms dominating the industry. All airport operators in hubs of major European cities have significant market power and control a large share of the European airport industry. They have a strong competitive advantage due to their size, reputation, and network of routes. They also have substantial economies of scale and scope, which allow them to offer a wide range of services at competitive prices.

However, despite the oligopolistic market structure, the airport industry is highly regulated by the European Union and national governments, which places limits on the pricing and operational freedom of airport operators. Additionally, the airport industry is also subject to competition from low-cost airlines and other forms of transportation, which puts pressure on traditional airport operators to maintain competitive prices and services. Unlike in the US, most European airports are publicly listed with the respective state owning a majority.

Risks/Downside

There are a number of risks/downsides to this investment, the main being a delisting risk and the risk of an improvement of the tender price or an extension of the takeover offer. Because the BidCo (IFM) owns less than 90% of Flughafen Wien and also does not intend to (and cannot) purchase a stake up to that 90% threshold, there is no risk of a squeeze-out under Austrian takeover law. 

Delisting Risk 

A small remaining free float stake in Flughafen Wien (meaning that not all free float shareholders tendered their shares) would mean that the price might drop even more than expected due to thin liquidity and institutional shareholders being forced to sell their shares on the market, resulting in larger gains for us. If, however, the overwhelming majority of free float shareholders decide to tender their stake, this could result in a delisting of the company, forcing us to close out our position at a potential loss. The risk of such a delisting is in our view small due to a number of reasons. 

A listing in the “Prime Market” segment of the Vienna Stock Exchange (most liquid segment) inter alia requires a certain minimum free float/market capitalization: for a free float below 25%, the market capitalization of the free float must at least amount to EUR 40 million. In the case of Flughafen Wien, this would mean that there will be no delisting from the “Prime Market” segment of the Vienna Stock Exchange as long as 1.4% of the company’s shares remain tradable at the current price of EUR 34.00 per share. At a price of EUR 26.30 per share (our target price), this would mean a required free float of 1.9%. We consider meeting both of these thresholds to be highly likely. 

If this is not the case, Flughafen Wien could still be listed on the “Official Market” (amtlicher Handel) of the Vienna Stock Exchange (less liquid market—traded a few times per week), allowing us to trade, due to our comparatively small position. The “Official Market” (amtlicher Handel) requires the listing requirements according to Section 40 of the Stock Exchange Act to be fulfilled (link). We consider both a remaining listing in the “Prime Market” and the “Official Market” to be likely. An incredibly high acceptance rate of the takeover offer would be necessary to lead to a delisting of Flughafen Wien. We believe that this is not the case due to (1) the high amount of unsophisticated retail investors owning the stock, (2) the board of Flughafen Wien rejecting the offer, (3) the existence of ADRs, (4) the stock continuously trading above the offer price, incentivisingshareholders to sell their share on the open market instead of tendering them directly to IFM and (5) the takeover offer prospectus of IFM explicitly stating that “For the avoidance of doubt, this Offer is not a so-called delisting offer pursuant to section 38 (8) Z 1 of the Stock Exchange Act.”

In regards to point 4 it has to be said that Flughafen Wien in cooperation with The Bank of New York (“BoNY”) as depository, offers shareholders to deposit their shares with BoNY against issue of American Depository Shares (“ADS”), which are certificated in the form of American Depository Receipts (“ADR”) (four ADRs are equivalent to one share of Flughafen Wien). Although IFM’s offer is open to shareholders of Flughafen Wien, it does not extend to ADS, irrespective of whether they are certificated in the form of ADR or not. Therefor the only way the US shareholders of Flughafen Wien can tender their shares is by returning their ADS to BoNY in accordance to the applicable depository agreement against delivery of the underlying shares and to directly accept the offer or to instruct BoNY as depository bank to accept IFMs offer in respect of such number of shares as are represented by the respective ADS. This situation makes it incredibly unattractive for US shareholders of Flughafen Wien to accept IFM’s takeover offer (ADRs also trade at a discount to the takeover offer), which should also prevent a delisting. There is no data on how many ADRs are currently in circulation.

Extension of Takeover Offer 

A downside risk for our investment is the extension of the acceptance period of the takeover offer as this will delay the catalyst for our investment resulting in higher cost of shorting the stock / higher time decay of option value if implemented with derivatives, impacting the potential gains of our investment. According to the takeover offer, IFM reserves the right to extend the acceptance period once or in several steps up to the maximum acceptance period of 10 weeks as provided for under section 19 paragraph 1b of the Austrian Takeover Act. Pursuant thereto, IFM will publish any extension no later than 3 trading days prior to the expiration of the initial or extended acceptance period. This means that we can mitigate the risk of an extension of a takeover offer by implementing the trade on February 6th, two days before the expiration of the takeover offer (February 8th). Additionally, it is also important to note that the acceptance period is not extended by the 3 month sell-out period (Nachfrist) as was the case in our SImmo/Immofinanz/CA Immo pitch as none of the cases pursuant to section 19 (3) of the Austrian Takeover Act apply (no change of control). 

Improvement of Tender Price

According to the takeover offer prospectus, IFM “explicitly reserves the right to improve this offer after its publication, including to increase the offer price.” Pursuant to Clause 15 paragraph 2 of the Austrian Takeover Act, the improvement of an offer must be made in time such that the offer remains open for at least 8 trading days after the publication of the improvement. If the acceptance period is not extended, IFM would therefore have to publish such an improvement of the offer price no later than January 30. Therefore, if as mentioned in the previous paragraph, we implement the trade on February 6th, we should be safe and there should be neither an extension of the offer price nor an improvement of the offer price after we implemented our trade. 

Additionally, if IFM or any party acting in concert with them tries to purchase shares on the open market within a period of 9 months after the expiry of the acceptance period at a higher price than the offer price, IFM is obliged to pay the excess amount to all accepting shareholders pursuant to section 16 paragraph 7 of the Austrian Takeover Act. Therefore, bidding up the price of Flughafen Wien shares on the open market after the expiry of the acceptance period is not in favor of IFM as it would simply increase the purchase price of the stake that was already tendered to them. It is therefore also in IFMs interest (being a long term investor) for the stock to drop after extension of the offer period, as it would allow them to purchase additional shares on the market once the 9 months after the end of the acceptance period are gone. After this 9 month period, IFM could continue to purchase stock at a price below their takeover price in order to increase their stake and eventually result in a delisting of the company. At this time we have already exited the position.  

Valuation

Image 7: Chart of Flughafen Wien (blue) versus S&P Transportation Index (orange) and other peers (gray)

Historically, Flughafen Wien’s stock has moved in line with its peers, which include the Fraport Group (Frankfurt Airport), Flughafen Zürich (Zurich Airport), Aena (which includes Madrid airport). Particularly, on a percentage basis (relative to price on Jan. 1, 2022), Flughafen Wien has moved most closely with the S&P Europe BMI Transportation Index (orange). As seen in the above graph, however, Flughafen Wien’s stock is now completely unmoored from its peer set. There are no idiosyncrasies which drive an elevated price beyond the tender offer.

The below graph shows where several airport stocks are relative to early June, 2022, when the tender offer was announced. In the time since, most firms have seen little to no share price improvement, with +/-10% at the extremes. We have set our base case as the median of this comp set, with share price returning to its Jun. 2022 position. Our bear case is based on the best performer, FHZN, which has appreciated 10.03%, and our bull case is based on ADB, which has had its stock drop by 8.68%. We expect this kind of price movement to be the reasonable range for where Flughafen Wien would be without the tender offer, giving a range of EUR 22.83 to 27.56 for true value, all of which are well below its tender offer price.

Image 8: Chart of Flughafen Wien (orange) shortly before takeover offer announces until present vs. peers (gray)

Image 9: Scenario Analysis

On the last trading day before IFM’s announcement that it had increased its shareholding to over 40% (June 10, 2022), Flughafen Wien shares were listed at a closing price of EUR 26.30 at the Vienna Stock Exchange. The offer price thus exceeds this closing price by EUR 6.70, corresponding to a premium of 25.48%. We therefore consider the EUR 26.30 price as our base case. Additionally, the share price analysis of investment banks and financial institutions most recently available before the last trading day prior to IFM’s announcement indicate the following target prices, which suggest upside in almost all cases: 

Image 10: Analyst price targets of Flughafen Wien prior to takeover offer 

Implementation (Naked Short/Pairtrade/Derivative)

There are 3 possible ways of implementing this trade. The easiest implementation is through (1) a naked short. The risk with this implementation is that we have unlimited downside. Additionally, we would be exposed to market moves in the overall stock market and could therefore not isolate the idiosyncratic event at Flughafen Wien in our trade. This might not be a huge risk given the short holding period. Currently there are 16.2k shares of Flughafen Wien (total EUR 550k) available for shorting at IBKR. The cost of shorting is currently at about 3% p.a..

In order to mitigate market volatility we could also implement our thesis via (2) a pair trade. In this case we would short Flughafen Wien (either naked short or with derivatives) and long another security in the airport space, preferably the S&P Europe BMI Transportation Index. Alternatively we could also long a basket of European Airports (Fraport Group (Frankfurt Airport), Flughafen Zürich (Zurich Airport), Aena(which includes Madrid airport), etc.). Such implementation would not only create a market neutral pair trade, isolating the catalyst event at Flughafen Wien but would also allow us to make the trade with a net zero investment by using the proceeds of the Flughafen Wien short to go long the S&P Europe BMI Transportation Index. Despite higher transaction cost this is our preferred implementation strategy especially in an environment of continued bear market rallies.

A last strategy of implementing this thesis would be to short Flughafen Wien via (3) derivative, preferably warrants or options. We could purchase out of the money puts (for example strike price EUR 25.00) with an expiration date far into the future (lower theta) which would give us significantly higher leverage on the trade. Additionally, due to the short holding period of the trade and the long remaining time until expiration, the time decay of the option would be minimal, increasing returns while mitigating downside risk if there is an extension of the takeover offer. On the other hand, this implementation would also carry more downside risk if the trade goes the wrong way, while limiting losses to the option premium paid (no unlimited downside risk as with naked short). An implementation via derivatives could of course also be implemented via a pair trade by buying a put option and longing the S&P Europe BMI Transportation Index. This would however not result in a net zero investment (option premium for long put and long Index).

Catalyst

We propose a short position on Flughafen Wien with a two-month price target of EUR 26.30 (22.65% upside, 340.4% IRR). Our investment recommendation is based on three primary thesis points: