Ferrovial: following the footsteps of Charles V
Spain’s Ferrovial wants to become the largest infrastructure company in the world. And to achieve this aim it is threatening to buy BAA, the largest airport company in the world and owner of Heathrow, Gatwick and Stansted, among others. This operation would put the seal on five head-spinning years and convert Ferrovial into the flagship of the new Spanish “Business Armada”. Five hundred years later, the spirit of Emperor Charles V has been recuperated.
Everything began in Canada, five years ago, when the Spanish company took over the Toronto 407 ETR highway, its first major incursion into the Anglosaxon world. After that came Bristol airport in the UK, Sydney airport in Australia, the Chicago (Skyway) freeway and the British company Amey which manages three subway lines in London through its subsidiary Tube Lines. However, the major jump came a year ago. In 2005 alone, the company bought the majority of Tube Lines, the Swiss company Swissport, which is world leader in land airport services, the Indiana freeway, the American construction company Webber, and has become a partner of the State of Texas in the development of the TransTexas Corridor.
The company wishes to consolidate this frenetic rhythm of growth in the exterior with the purchase of BAA. Last week, Ferrovial put a price to its latest adventure: 810 pence for each share, in other words, more than 12.6 billion euro for the whole company. The board of the British company rejected the offer as too low, and want a minimum of 900 pence per share, or 9 billion pounds (13 billion euro) for the group. Ferrovial has defended its bid by alleging that it is offering 27% more than the average quoted price of BAA before its intentions were made known, and 30% more if the last 12 months are taken into account.
Strategy: the Anglosaxon world
However, Ferrovial is not prepared to give up, at least for the moment. Moreover, whether it buys BAA or not, the company has made it clear that the world, and in particular the Anglosaxon world, is its marketplace. Wharton professor Mauro Guillén considers this strategy to be a hallmark of the group. Guillén has closely followed Ferrovial and has come to the conclusion that part of its powerful international expansion came as a response to the need to seek out new sources of growth abroad as it is not the leader in its natural market, Spain.
Guillén also points to the international character of Spanish construction and infrastructure groups. “It should be remembered that Spanish construction companies have always been very international. Since 1960 they have been carrying out projects in different parts of the world. Spanish engineering is very good. Don’t forget either that cheap money (thanks to the euro) allows Spanish companies to be able to leverage themselves and to carry out large-scale projects abroad, something which was not possible before 1998”.
In the opinion of Esteban García Canal, professor of business administration at the University of Oviedo (Spain), the key to Ferrovial’s successful growth lies in its broad experience, which has provided the base from which the company has been able to enter the world stage. “Companies which operate in regulated sectors, as is the case with Ferrovial with regard to the management of infrastructure projects, accumulate very relevant experience in their domestic market, not only in project management but also in the management of relations with politicians and regulators. The significant development of infrastructure projects over the last few decades in Spain as well as the recent international experience has provided Spanish companies with a background in both these aspects that explains their current success”.
However, Ferrovial is somewhat of an exception among Spanish firms. While other constructors were looking towards Latin America, the company founded by Rafael del Pino preferred to set its sights on the Anglosaxon world, breaking the mould. Professor Guillén considers this change of direction to have been a good idea: there was an opportunity and Ferrovial knew how to detect it before the others.
“The US is an ideal market. The infrastructures are in bad shape as there has not been any investment in them in years. Moreover, the central and local governments are going through a financial crisis, so they try to raise funds through privatisations and tenders which attract private capital. It’s no surprise that Spanish infrastructure companies, which are very competitive, have captured part of the market”.
Professor García Canal, on the other hand, also points to political stability as a reason to explain why Ferrovial has preferred the Anglosaxon world to Latin America. “When a company works in the infrastructure sector, political stability is a very important variable, especially once the concession has been granted. Macroeconomic stability is also important. These two types of stability help in the financial planning of the operation and both exist in the US and the UK”.
Playing with size
After the dizzying rate at which Ferrovial made purchases last year, the construction company closed 2005 with revenues of 8.989 billion euro, up 24% from the previous year. 43% of these revenues came from abroad, which represents an increase in foreign revenues of 45%. Net profits were 415 million euros, 21% less than the previous year due to the absence of extraordinary items (the previous year’s figures included profits from the entry to the stock market of Cintra, its infrastructure subsidiary).
The company’s acquisitions policy provoked a large change in its treasury position, with a positive cash flow of 139 million euro turning into a debt of 271 million euro by the end of 2005. However, these red numbers are relatively small when one considers that Ferrovial invested over 1.7 billion euro last year.
The reason for this balanced cash position is that the company does not include the debts associated with many projects in its accounts. Instead, these debts, which are over 8 billion euro, are taken on by the different consortiums that it creates for bidding for contracts. The debt figure would be astronomical if it bought the BAA airports. However, as professor García Canal points out, “the operation would convert Ferrovial into a highly leveraged company, which should not pose a problem given the composition of its project portfolio”.
Ferrovial has allied itself with the Caisse de Depot et Placement du Québec and with GIC, the investment fund of the Government of Singapore, in order to bid for the British company. Together they have created the consortium Bidco, of which the Spanish company holds 60%. However, the board of BAA does not seem willing to succumb to the pressure of the Spanish company. Nor does the British press, with the Financial Times labelling Ferrovial as a “boa that wants to eat a cow”. In fact, some commentators consider that the Spanish company is biting off more than it can chew with this operation - in their view, BAA is simply too big and too important to allow itself to be bought.
However, Professor Guillén replies that “in business, the little fish can eat the big fish when it has a better idea of the business and the necessary financial muscle. Ferrovial is probably the best infrastructure management company in the world. Thus, it should not come as a surprise if it wished to acquire a less-powerful and more poorly-managed company. The Financial Times (and the rest of the British press) are simply reflecting British attitudes of superiority, that is, they cannot fathom how a small Spanish company could possibly acquire a British one. They had better get used to it because the international expansion of Spanish companies has just begun”.
Recently, Spanish companies have carried out important operations in the UK. For example, Banco Santander bought Abbey; Telefónica bought the cellphone operator O2; and Abertis bought the TBI airports, whose flagship is Luton. However, Ferrovial has gone even further, and has set its sights on one of the Crown jewels: Heathrow. Considered a strategic asset, until recently the British government have the right to veto any possible acquisitions.
Six weeks ago, Ferrovial revealed its interest in acquiring BAA by making a takeover bid. Since then, the company’s stock market value has risen dramatically, almost to the price offered by the Spanish company, and there have been constant rumors about the possibility of a counterbid. The principal candidate here is the Australian bank Macquarie who, curiously enough, is a frequent partner of Ferrovial in bids for international contracts - this was the case for example with the Sydney airport, the 407 ETR highway in Toronto or, more recently, the Indiana freeway.
When it was revealed that the Spanish group wished to buy London’s airports, there was immediate speculation that Macquarie was involved in the operation. Later, however, this was proved unfounded and there was speculation that the Australian company would fight its own battle, a possibility that Bruno Silva, analyst with the Portuguese bank BPI, does not write off. In declarations to the Dow Jones agency, Silva argues that the fact that Macquarie is not in the consortium could indicate a future takeover bidding war. In fact, he considers that the first offer by the Spanish company was merely a timid overture which could turn into a more solid offer. However, he also warns of the risk of overestimating the value of BAA if there is eventually to be a takeover battle between Ferrovial and Macquarie.