Congratulations to Nils Pratley and the Guardian business team for resisting (so far) the temptation to use the phrases "crown jewels of the British economy" or "a Wimbledon economy where all are welcome but the hosts never seem to win" in their coverage of the takeover of BAA by Ferrovial.
From the BAA point of view there is not much that we haven't seen before in big domestic takeovers; blah blah globalisation, blah blah short term markets, blah blah can't discriminate about foreigners, etc. One can't help feeling a bit nostalgic for the days when Will Hutton's Observer would get terribly worried about the phenomenon of foreigners showing up and paying more for British companies than their shareholders thought they were worth, but they are over (I see Will doesn't like the deal, but not for that specific reason).
A more interesting question is to look at this from the other side and ask what Ferrovial thinks it's playing at; why did they think that it was a good deal to pay roughly 50% more than the stock market valued BAA at a couple of months ago, given that there has been one fairly serious piece of bad news (the OFT investigation) in the meantime? Apart from the personal reality distortion field of Marcus Agius, who is a seriously impressive investment banker and head of Lazard's London office, there are only a few possible explanations.
The "Spanish acquisition subsidy" is part of the story. Under Spanish accounting, if you pay more for a company than the value of its assets in the balance sheet (which is not such a daft thing to do as one might think; you might expect to earn profits using those assets), you can treat the difference between the balance sheet value and the price you paid as a cost, and deduct it from your taxable profit. This means that, crudely speaking, if you are a company which pays Spanish corporation tax, then if you overpay for an acquisition, the Spanish taxman will pick up 30% of the cost of your error. (Fellow analysts bear with me here; there is no way on earth I am going to try to explain all the details of "Spanish goodwill" on the Guardian blog.)
It's part of the story but nowhere near the whole of it, however. BAA is actually quite an asset-heavy company, and the value of the tax subsidy is only about 50p out of the 935p price paid. Furthermore, the opposing bid consortium, the one led by Goldman Sachs, was actually prepared to pay 940p and they aren't as far as I know, in a position to benefit from Spanish tax law.
What is actually underpinning this deal is that Ferrovial and the other bidders were prepared to put a massive bet on the UK's lenient regulatory culture. BAA is a monopoly, as Michael O'Leary of Ryanair keeps pointing out, and so it could probably charge a lot more for the use of its airports if it really wanted to and was allowed to. The stock market was assuming that BAA would not be prepared to really take the mickey in terms of its landing fees over the medium term, while the economics of the two bids appear to be dependent on the taking of a significantly larger amount of Mickey.
It is hard to see this as totally irrational. Anyone with any experience of the UK infrastructure sector will presumably have as their default assumption that when push comes to shove, UK regulators are a really soft touch when faced with companies which have promised to fill some obligation or other, but have decided that they would rather pay a big dividend instead. This is the potted history of the PFI, of rail regulation and so on.
The Civil Aviation Authority have said that they don't propose to be a soft touch. Their statement on the deal said that they would regulate landing charges "in accordance with its statutory duties and not in order to accommodate any particular financing arrangements adopted", which is most likely a reference to the amount of debt that the Ferrovial consortium is taking on. However, it is one thing to talk tough when the deal is announced, and quite another thing to face up to the new owners of BAA two years down the track when they claim to be unable to pay their interest bill and unable to finance Heathrow Terminal 5 without a substantial fee increase.
The rail regulator acquiesced time and time again to Railtrack's broken promises, and the bet surely has to be that the CAA will too as long as the new consortium can keep BAA out of actual bankruptcy, which it certainly looks as if they can - there is not really that much debt in the new structure, and the credit ratings agencies have only taken BAA down one notch from A to BBB+. The BAA deal is basically a big bet on "rip off Britain".
