How we assisted a consortium in assessing an opportunity to acquire the right to operate an airport
This case study is just one example in our spectrum of Capital projects & infrastructure services to a wide variety of industries.
A consortium consisting of both strategic and financial buyers was assessing an opportunity to acquire the right to operate a medium-sized US commercial and fixed based operator (FBO) airport under a long-term lease from the current government municipality, in accordance with a concession agreement. The potential transaction represented one of the first privatizations of a US airport which raised many issues and concerns for the client around potential financing, separation of an asset from a municipal government, operating requirements and the predictability and cash generating capability of the asset. The consortium's primary concern was determining the ongoing cash flows of the new company, given the expected changes to the operating model, the terms of the concession agreement and the investment made to enhance revenues.
After meeting with our Infrastructure transactions team, PwC was engaged to perform financial, tax and HR due diligence as well as provide deal structuring advice, and understanding privatization issues inherent in the local municipality. Key considerations included:
- How did the various federal, state, and local regulations impact the revenues and fees to be charged by the airport? What were the revenue drivers and how should these be assessed in a privatized scenario?
- What were the true historical operating costs of the airport?
- What would the ongoing federal, state and local tax obligations of the airport be given that no historical tax profile existed?
- How would purchase accounting and the fair valuation of the various assets assumed as part of the concession agreement impact taxable income?
- What would the ongoing working capital needs and financing requirements be given the seasonality and trends in passenger volumes, as well as the timing differences between restricted cash inflows and required cash outflows?
- What pension and other employee liabilities will be assumed by the new company and what will the ongoing cash expenditures be for employee benefit related plans? How do state and local laws impact these arrangements?
The PwC team assisted in analyzing, quantifying and identifying key drivers of future cash flows and the related inputs and assumptions needed for the client to develop a detailed valuation model and business plan. Our work was focused around four key areas including: 1) financial diligence, 2) tax diligence and structuring, 3) purchase accounting, and 4) benefits and compensation. The key outputs of PwC's work included:
Financial due diligence
- The PwC team was focused in large part in analyzing historical financial data, assessing the standalone operating costs, and building a bridge from actual data to the business plan based on key terms in the concession agreement and in understanding key working capital trends and funding requirements. Although the auction process provided access to limited information and brief meetings with airport management, the PwC team was able to assist in building-out key components of working capital and our client's assumptions as to run-rate operating costs and revenue streams.
Tax diligence and structuring
- Our team developed a detailed analysis of applicable federal, state and local taxes based on an understanding of the various revenue and operating characteristics of the business (parking, concessions, airline fees, employee, income tax, etc.) and assisted our clients with modeling each of the significant taxes. In addition, we developed numerous structuring options to address potential tax exposures.
- As two members of the consortium were public companies, they needed to understand the impact of purchase accounting on net income and the non-cash charges which would be included in the P&L. Utilizing PwC's valuation and technical accounting expertise, the PwC team estimated the various asset classes and provided book and tax depreciation periods such that the clients could include these aspects in their model and understand the impact to each of them on net income to avoid any surprises post acquisition. In addition, we advised the client on the accounting for the long term lease and concession which would accommodate the financial reporting needs under both US GAAP and IFRS.
Benefits and compensation
- A large portion of the employees working at the airport were covered by union agreements and, as a result, significant pension and benefit considerations existed in transferring employees to the new company. We structured benefits programs which would accommodate the municipality's request for "substantially similar" benefits without comprising the client's own programs. A primary focus of the PwC work was determining the ongoing cash cost of providing the required level of benefits to transferring employees and quantifying historical liabilities which might be assumed as part of the transaction.
Impact on client's business
Little of the historical financial data could be utilized to assess future operating results and cash flows because of the planned changes in the operating model of the airport and the quality of available data. As a result, the work required PwC to be creative in finding quantitative and supportable solutions and answers to key due diligence questions. PwC's findings and recommendations on the input to the client's model provided the consortium with the information necessary to assess their bid with confidence and derive their valuation based on supportable and detailed analysis.