Grupo Ferrovial from Spain acquired BAA PLC, the UK airport operator, in June 2006 following one of the most interesting battles for control in recent years in Europe. BAA was an extremely successful and profitable company, managing Heathrow and Gatwick airports in London, among others. The A case, Financial Strategy at BAA PLC, discusses the structure of the target company and specifically its capital structure. BAA’s asset base was very stable, low risk and very well protected from competition. The firm had been generating substantial cash flows over the past few years and had completed some acquisitions at home and abroad. Yet, it was underleveraged, not only according to the simple capital structure theory but also compared to its peers. Therefore, Grupo Ferrovial (and Goldman Sachs, which was competing to acquire BAA) found a great value opportunity by leveraging up BAA’s assets. The B case, Ferrovial Conquers the UK, guides us through the acquisition process and in particular through the financing aspects of the deal. The BAA–Ferrovial Acquisition received the Finance Package of the Year Award by Acquisitions Monthly Magazine. The deal was the largest infrastructure acquisition financing ever undertaken in the debt markets; it contained the largest second lien tranche ever, which maximized liquidity, tapping interest among both banks and fund investors; and had a groundbreaking structure designed potentially to survive a whole-business securitization.
The case can be used with a broad range of audiences and provides opportunities to discuss the basics of capital structure and financial policy; to describe the functioning of debt markets; to follow a complex acquisition that went from hostile to friendly; to discuss syndication in the credit markets; and to analyze the challenges that CFOs face in order to balance the threat of acquisitions with the need for a conservative capital structure. It can be used in a basic finance course to introduce capital structure and debt financing. It can also be used with finance teams and with executives in general as a way to discuss the complex terms of the transaction.
Grupo Ferrovial (Old name), BAA Plc (Old name)
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