GVK sells residual 10% stake in Bengaluru airport to Fairfax India

GVK has sold its residual 10 per cent stake in Bengaluru Airport to Fairfax India for Rs 1,290 crore. The transaction is expected to be completed by early next month. The company plans to use the proceeds of this sale to reduce its debt obligations.

In March 2017, GVK closed a deal with Prem Watsa's Fairfax to sell a 33 per cent stake in Bengaluru International Airport (BIAL) for $330 million. The deal was signed in March 2016. GVK retained a 10 per cent stake and the management of BIAL. The company had entered BIAL in 2010.

G V K Reddy, founder chairman and managing director of GVK, said despite the sale, the airport sector would continue to be a core focus for the company.

“The airport is ready for another phase of expansion with a new runaway and a new terminal to be constructed. However, we have decided to part ways with BIAL, as deleveraging is our top priority,” said Reddy.

The company’s immediate focus will be on Mumbai and Navi Mumbai airports and on selectively evaluating privatisation opportunities, Reddy said. The reduced debt burden gives GVK flexibility and releases management bandwidth to focus on these projects.

Capacity optimisation and real estate development will be the key focus areas of the existing Mumbai airport, said Reddy.

Fairfax India through a wholly owned subsidiary entered into a separate agreement to acquire additional five per cent equity from Zurich Airports’ interest in BIAL for $49 million.

Watsa said three potential sources of revenues for BIAL include aero revenue, non-aero revenue and real estate monetisation. Aero revenue has grown at 25 per cent per year over the last eight years. 

Aero revenue is earned for providing services such as navigation, landing, take-off, parking, ground handling and ground safety. Rates for these individual services are fixed in a manner to get the airport operator a fixed 16 per cent per annum regulated return on invested equity. 

All other sources of revenue, barring aero revenue, are accounted for as non-aero revenue. This includes income from activities such as cargo handling, fuel sales, food and beverage sales and duty free shops. BIAL takes an interest free deposit from all concessionaires and earns annual revenue on a minimum guarantee, revenue share or fixed rental basis.

Non-aero revenue has grown at a compounded annual growth rate of 16 per cent between 2009 and 2016. It is expected to grow substantially due to an increase in passenger growth rates, the availability of additional space and increasing propensity of passengers to spend money.

BIAL also comes with 460 acres of excess land that can be monetised by the operator. So far, apart from building a hotel next to the airport and leasing it to Taj Hotels Resorts and Palaces on a management contract, all other land is undeveloped. 

Bangalore’s historical population areas are getting congested, hence, the city is expanding in BIAL’s direction. There will be a significant upside over the time from monetisation of this real estate, said Watsa.

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