Alternative Investors Making the right choices by Louis Li

G LO B A L T R A N S P O RT

Alternative Investors: Making the right choices

K P M G I NT E R N AT I O N A L

Contents

Foreword

Activity overview

But why now?

Funds: both sides of the coin

How KPMG can help

Our experience

ÂŠ 2007 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.

Alternative Investors: Making the right choices 1

Foreword

Global investment in the transport industry has never been greater, with aviation, port, bus, road and railway assets all being acquired. Interest comes at a time of record levels of mergers and acquisitions throughout industries and markets globally. An increase in competition for assets has occurred as the focus of private equity, hedge, real estate and infrastructure funds (commonly known as ‘funds’) has converged within the transport sector. This has resulted in a dramatic increase of capital targeting a scarce supply of assets. It has also broadened the definition of what can be thought of as “infrastructure”. One of the key drivers behind funds’ interest in transport lies in the nature and quality of the net revenue stream it can offer. It is becoming clearer that these features can also be present in transport entities with little traditional or fixed infrastructure. Within the funds industry, an increased availability of money from pension funds, combined with accommodating debt markets, has meant that funds’ spending power has never been greater. However, their increased profile has also bought with it a level of sensitivity and attention, with both the shareholders and employees of targeted companies unsure of whether the interest of funds is positive or negative.

As more funds have been chasing a finite number of assets, prices being paid have risen, which has in turn placed pressure on the returns achieved from these investments. Funds have been forced to look for improved returns in the less traditional transport infrastructure areas such as shipping, rail, logistics and aviation, while accepting that these may have an increased risk profile. Whether you are an existing transportation or transport infrastructure company, KPMG’s global network of firms has the experience and knowledge to assist you. The KPMG team strives to deliver clear, pragmatic advice to enable you to make the right choices as opportunities in this market continue to emerge. If you have any queries on this, or any of our services to the wider transport industry, please do not hesitate to contact us directly.

Dr. Ashley Steel Global Chair – Transport KPMG LLP (U.K.) Nick Chism Global Infrastructure and Projects Group KPMG LLP (U.K.) Tony Rocker Alternative Investments Group KPMG LLP (U.K.)

2 Alternative Investors: Making the right choices

“In recent months, funds have played a more active role in this space, with a number of high-profile deals throughout the spectrum of transport assets.”

Alternative Investors: Making the right choices 3

Activity overview

In the last 18 months there have been a number of high-profile transactions taking place across transportation and transport infrastructure sectors, with investors keen to exploit reliable income streams and take advantage

of liquidity in the debt markets. As the market has developed, prices have been pushed up dramatically and we have seen price x earnings multiples increase by as much as 15 times in certain sectors. This does not mean

that the funds always have it their own way. As the activity table makes clear, funds have not always won against traditional trade buyers.

Sector

Date

Asset

Acquirer

Consideration (US$m)

Aviation

October 2006

Icelandair Group

Investor Group

Aviation

October 2006

London City Airport

AIG/GE Capital/Credit Suisse Infrastructure fund

Aviation

June 2006

BAA plc

Consortium led by Ferrovial

Aviation

January 2006

Smartcard

Macquarie- Black Diamond Capital Management

Bridges & Roads

January 2007

A65 motorway (France)

Eiffage/Sanef

1,460

Bridges & Roads

January 2005

Chicago Skyway Toll Bridge

Cintra-Macquarie consortium

2,151

Bus

June 2006

Stagecoach London

Macquarie

Logistics

August 2006

TNT NV-Logistics Division

Apollo Management LP

Parking

December 2006

Chicago Downtown Public Parking System

Morgan Stanley

563

Parking

November 2005

New York off street parking â&#x20AC;&#x201C; Icon Parking

Macquarie led consortium

634

Ports & Shipping

May 2007

Mersin Port (Turkey)

Singapore PSA International & Afken consortium

755

Ports & Shipping

August 2006

ABP plc

Goldman Sachs

6,575

Ports & Shipping

March 2006

P&O

DP World

8,720

514 1,430 29,620 270

505 1,896

Sources: Thomson SDC, Infrastructure Journal, Infra-News, KPMG in the UK (2007)

4 Alternative Investors: Making the right choices

ÂŠ 2007 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated.

But why now?

The demand for transport is growing as more countries industrialize, greater numbers of people travel, globalization increases international trade volumes and changes in governments’ policies favor investment. Additionally, the threat of terrorism, changing regulatory standards, and the importance of environmental management have all impacted the market. One area where this has been seen is in the aviation sector which has witnessed a dramatic rise in M&A activity with airlines (Alitalia and Iberia) and airports (Leeds, London City and Budapest) all seeing interest from funds. The rise of interest by funds within this industry can be attributed to a number of factors:

Why the number of funds are increasing

Why the funds are targeting these assets

• Increased capital available from pension funds due to changing demographics and pensions legislation in some countries.

• Mature assets held for the long term. • Stable cash flows linked to inflation. • Secure revenue streams from contracts typically with Government Departments or local authorities.

• A strong global economy has supported a period of historically low interest rates. • Increased competition in the debt markets has resulted in lower margins and a reduction in covenants on financing. • This rapidly maturing market means banks have a better understanding of the infrastructure market, enabling them to price the deals more accurately and occasionally involve themselves in deals through bridge equity.

• Assets are often monopolistic in nature. • Highly regulated industries. • Limited commercial, market or operational risks. • Low correlation with other asset classes.

Alternative Investors: Making the right choices 5

Funds: both sides of the coin

There are a number of advantages and disadvantages to the involvement of funds in this industry. Some of the main considerations are expressed below: Advantages • The lighter regulatory, reporting and governance environment of a privately owned company (especially in comparison to one that is government owned or stock market quoted), allows senior management to focus on the company. • Funds bring with them highly experienced management teams that have in-depth knowledge of the industry and the key factors that it faces.

• Experienced management is able to crystalize opportunities and focus on long term value creation through a highly structured business plan and performance driven remuneration. • Funds have significant levels of capital available allowing them to support investment targets. • Funds are expected to continue to pay high premiums for strong well managed assets. Disadvantages • High gearing of the company or assets increases the risk of insolvency.

• Negative publicity of fund ownership may affect the brand name of acquisition targets. • Changes in strategy could potentially result in only the core assets being retained which may be perceived as “asset stripping”. • Shareholders may experience lower than hoped offers for their holdings as nationalistic attitudes may adversely affect the ability to attract foreign financial consortiums, thus limiting the number of bidders involved and ultimately impacting on the premium paid for target assets.

• The impact of effective cost management on the work force may lead to challenging negotiations with unions.

6 Alternative Investors: Making the right choices

How KPMG can help KPMG firms offer a broad spectrum of professional services to companies involved in this sector. Our deep understanding allows us to offer an informed and insightful view of the key challenges facing the industry from both investor and target company viewpoints. Some of the ways that we can provide assistance include: • Advising on mergers and acquisitions, from strategic analysis through to financial and taxation due diligence. • Providing advice on understanding whether a potential acquisition approach provides best value, including shareholder options. • Providing post-transaction services such as operational audits, assessment of health and safety programs and review of Corporate Social Responsibility (CSR) reporting preferred practice. • Providing advice on major ‘growth’ projects such as capital investment programs, property redevelopment and improving surface access to transport infrastructure assets.

KPMG’s member firms can help clients by providing bespoke support to work towards successful outcomes. Key services include. Corporate finance: • Mergers and acquisitions support • Financing of capital investment programs

Debt advisory services: • Funding structures, including securitization • Financial modeling Post-transaction services: • Environmental, health and safety audits • Operational and IT audits • Statutory audits

• Advice on entry and expansion strategies • Advice on regulatory issues such as bid defense • Project finance and public private partnerships

• Accounting advice • Regulatory advice • CSR reviews • Assessment of programs and management activity

Transaction services: • Due diligence • Tax and accounting structuring Property advisory services: • Advice on redevelopment and regeneration projects • Consideration of surface access issues

Alternative Investors: Making the right choices 7

Our firms’ experience

Our team operates on a global basis with strong industry experience. KPMG firms have solid fund credentials, and our international experience includes acquisition and financing strategies, regulatory issues and contract negotiation, as well as due diligence and tax.

Awards KPMG member firms

Transport and Infrastructure

Financial Adviser of the Year

Public Private Partnerships

Adviser of the Year

2007 Winner

Europe, Middle East & Africa

Project finance Magazine

Awards

KPMG member firms 2006 European PPP Deal of the Year Limerick Tunnel Deal

Dublin Metro Rail (ongoing) Financial adviser to the Railway Procurement Agency (RPA) on the planned Dublin Metro Rail System with a tailored approach to the characteristics of the Dublin Metro and the Irish PPP framework.

National Roads Authority (ongoing) Irish National Roads Authority (NRA) 2 billion euro PPP roads program. Key role in the development of policy for the NRA and assisted in the development and application of a financial evaluation model and a public sector comparator.

Limerick Tunnel (2006) Business adviser on the 400 million euro tunnel under the river Shannon in Ireland.

London City Airport (2006) Vendor due diligence for the disposed group.

Exeter Airport (2005) Financial and strategic advisory services.

Permira (UK) (2005) Provided due diligence for Permira in their acquisition of a major stake in Jet Aviation.

2006 Winner

Americas

Awards

Awards 2006

KPMG member firms

Transport and Infrastructure

Financial Adviser of the Year

Global Financial Adviser

of the Year

KPMG member firms

2006 Global Deal of the Year

Golden Ears Bridge Deal

2006 Winner

Texas Department of Transportation – Trans-Texas Corridor (Ongoing) Financial advisory services to the Texas Department of Transport to provide commercial and financial advice on their PPP program.

ANC Group (2006) Acted as financial adviser to Lloyds TSB Development Capital and the management shareholders on the sale of ANC Group to FedEx Corporation.

Awards

Awards 2006

KPMG member firms

Public Private Partnerships

Adviser of the Year

KPMG member firms

2006 Transportation

and Infrastructure

Financial Adviser of the Year

2005 Winner

2006 Winner

Golden Ears Bridge – Vancouver (2002-2006) Business adviser to Translink on a C$1.1billion private finance deal for the bridge.

Virgin Atlantic Airways (2005) Financial adviser in sale of US ground handling business to WFS.

Rock-It Cargo (2004) Acted as financial adviser to Rock-It Cargo on its recapitalization, including the raising of mezzanine financing.

8 Alternative Investors: Making the right choices

DPWN AG (2006) Acted as financial adviser to DPWN AG on the acquisition of Williams Lea Group Limited.

DP World (2006) Provided purchase price allocation services under International Accounting Standards in connection with the Company’s acquisition of P&O.

Englefield Capital (PE) & International Port Holdings (2006) Due diligence in respect of the part acquisition of Great Yarmouth Port.

Ferrovial (2006) Due diligence assistance in connection with Ferrovial’s successful US$30 billion bid for BAA.

Attiko Metro, Athens Metro Extensions (2004-06) Financial and commercial adviser to Attiko Metro on three planned extensions to the Metro of Athens including advising on the balance between public and private financing and project governance.

Hungarian State Property Agency (Hungary) (2004-06) Provided advice on the privatisation of a major river port in Budapest. KPMG recommended a privatization strategy; structured the transaction; prepared sales related documents; contacted potential investors and evaluated bids.

AFSINAG (Germany) (2005) Advisory services regarding PPP projects.

DHL UK (2005) Acted as financial adviser to DHL Distribution Holdings (UK) Limited on the sale of Fuelserv Limited to ReD plc.

Sagard Private Equity (2005) Assisted Sagard Private Equity and its management team on the acquisition of CEPL (OBO).

Tuffnells Parcels Express (2005) Acted as financial adviser to the shareholders of Tuffnells Parcel Express on its sale to management and the Bank of Scotland.

Warnow Crossing road tunnel (2005) Refinancing and model review advice to Macquarie and a consortium of banks.

3i (2005) Provided commercial due diligence in UK£193 million acquisition of Aviapartner from Belgian private equity firm Sonfinim.

Asia Pacific Bahrain Ports Privatization Advised Bahrain’s Ministry of Finance and National Economy on the privatization of the existing Mina Salman Port and the new Khalifa bin Salman Port. China Ports Privatization Assisted China’s largest port operator on the potential restructuring of a significant portfolio of port assets.

Port of Melbourne Advised the Victorian Government on ownership and operating structures for the former Port of Melbourne Authority.

Alternative Investors: Making the right choices 9

kpmg.com

For more information please contact: Dr Ashley Steel Global Chair – Transport KPMG in the U.K. Tel: +44 20 7311 6633 Email: ashley.steel@kpmg.co.uk Nick Chism Partner KPMG in the U.K. Global Infrastructure and Projects Group Tel: +44 20 7311 8603 Email: nick.chism@kpmg.co.uk Tony Rocker Partner KPMG in the U.K. Alternative Investments Group Tel: +44 20 7311 6369 Email: antony.rocker@kpmg.co.uk Joe Short Global Executive – Transport KPMG in the U.K. Tel: +44 20 7311 2637 Email: joe.short@kpmg.co.uk

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. Corporate finance services, including Financing, Debt Advisory, and Valuation Services, are not performed by all KPMG member firms and are not offered by member firms in certain jurisdictions due to legal or regulatory constraints.

© 2007 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. Designed and produced by KPMG LLP (UK)'s Design Services Publication name: Alternative Investors Publication number: 306-393 Publication date: May 2007