Centro Norte action: Vinci’s investment validates the Bull case (NASDAQ: OMAB)

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The new that Vinci SA (OTCPK:VCISF, OTCPK:VCISY) will acquire a stake of nearly 30% in Grupo Aeroportuario del Centro Norte (NASDAQ:OMAB) went largely unnoticed. I would say this is actually a major development for the Mexican airport operator – and a positive.

Vinci is no ordinary infrastructure fund. It is a conglomerate which, in addition to its expertise in construction and its network of toll motorways, has built up a portfolio of world-class airport concessions. Don’t expect Vinci to be a passive shareholder: it will be actively involved, and I expect Centro Norte to benefit from Vinci’s global network.

Beyond the strategic importance of the acquisition, there are several takeaways for Centro Norte retail shareholders. Vinci’s investment of course confirms the attractiveness of the operations, which should benefit from macro trends of a growing Mexican middle class and the relocation of manufacturing to North America. The amount of the transaction, at US$815 million for 30%, suggests that the current share price is cheap. Vinci is also likely to support a generous dividend policy. What about a full takeover by Vinci? Unlikely at this point, in my opinion.

The transaction

On July 31, Centro Norte announced that its major shareholder, Fintech Advisory Inc., had informed it of its intention to sell its company c. 30% stake in the airport operator:

This sale will be implemented by the sale to Vinci of 100% of the interests in Servicios de Tecnología Aeroportuaria, SA de CV (“SETA”) and Aerodrome Infrastructure S.á rl (“Aerodrome”), which, at the time of the sale will hold 49,766,000 Series BB shares and 7,516,377 Series B shares of OMA, in the case of SETA, and approximately 58,529,833 Series B shares of OMA in the case of Aerodrome. The agreed purchase price for the sale of SETA is approximately US$578.7 million and the agreed purchase price for the sale of Aerodrome, net of debt, including intercompany debt between Aerodrome and certain Fintech subsidiaries, is approximately $236.7 million.

Source: Centro Norte press release of July 31

As shown in the pie chart below, Vinci is acquiring two separate legal entities, for a combined amount of US$815 million. This will make the French company the largest shareholder in Centro Norte, since no other major owner stands out in the capital structure.

Presentation of Centro Norte H1 '22 results shareholding pie chart

Centro Norte H1 ’22 results presentation

Financial close of the transaction is expected by the end of 2022.

Who is Vinci?

Despite being one of the largest engineering and construction companies in the world, Vinci may not be familiar to North American readers. The stock, mostly listed in Paris but also available over-the-counter in the US, is a solid investment on its own, and I’ve covered it several times in the past (see HERE).

Suffice it to mention here that Vinci, whose concessions primarily included toll roads originally (the model usually involved Vinci building and operating highways in Europe), has created an impressive airport division over the past decade. Prior to the Centro Norte transaction, Vinci operated approximately 45 airports in 12 countries in Europe, Asia and the Americas.

Presentation of H1 '22 results of Vinci map of the airports portfolio

Vinci H1 ’22 results presentation

Most of these are operated on a concession model – a notable exception being London Gatwick, which is freehold.

Vinci Airport Wallet Map

Vinci FY21 Financial Report

After the Centro Norte agreement, this number will grow to 70 airports in 13 countries, including recent additions in Brazil and Cabo Verde.

What this means for Centro Norte

Obviously, having the largest private sector airport operator in the world as a major shareholder can only be seen as a positive. First, Vinci’s investment is recognition of the quality of Centro Norte’s assets. Above all, Centro Norte, whose flagship airport is Monterrey, an industrial powerhouse, stands to benefit greatly from the relocation of manufacturing to North America, which Vinci should be aware of. This thesis has been well explained by various authors on this site (see HERE).

It goes without saying that Vinci will not be a passive shareholder of Centro Norte, quite the contrary. The European company intends to deploy its long-term partnership model to support the country’s tourism industry and economic growth, according to a statement from Vinci. Centro Norte and Vinci’s airport division can be expected to share best practices and, for example, leverage their global network when negotiating with suppliers.

A word on implicit evaluation

The transaction also gives some indication of the value of Centro Norte. First of all Vinci Press releasewhich clearly presents the acquisition as a 25-year concession, recalls that Centro Norte operates its airports under a concession expiring in 2048 – like its peers Grupo Aeroportuario del Pacifico (PAC) and Grupo Aeroportuario del Sureste (ASR). Concessions can be renewed beyond, but there is no guarantee. This must be taken into account in the valuation of Mexican operators: it is more prudent to consider that the concessions will expire in 25 years.

That being said, what does the Vinci transaction price tell us? At US$815 million for a 30% stake, it values ​​capital at about. $2.72 billion, compared to a market capitalization of US$2.59 billion at the current share price of $53.66 for NYSE-listed stocks. This implies that Vinci paid about. $56.3 per share for his bet. Since large holdings like this usually come at a discount, this should give minority shareholders confidence that Centro Norte is worth more than the current share price. In fact, price action in Centro Norte lagged Pacifico and Sureste, whose passenger numbers rebounded faster, helped by a buoyant tourist segment:

Chart
OMAB data by YCharts

Based on the Vinci deal, Centro Norte should be worth at least 10% more and close the gap to its Mexican peers.

Vinci’s involvement should support the dividend

One aspect that will be important for income-oriented investors is the distribution policy. Centro Norte has been a rather generous dividend payer, with a typical return of 4%, nothing to complain about for a growing company.

Centro Norte H1 '22 Results Presentation Dividend History

Centro Norte H1 ’22 results presentation

I expect Vinci to favor substantial dividends as well. Centro Norte could bid for new concessions, perhaps in the Caribbean where Vinci already has a presence, but given Centro Norte’s strong balance sheet, that shouldn’t threaten distributions. And from Vinci’s perspective as a group, it doesn’t make sense to leave cash idle in a subsidiary, when it can put that capital to work elsewhere in its global business. This should support generous distributions in the future.

Take away food

Vinci’s investment in Centro Norte, and its probable involvement in the Mexican operator’s strategic decisions, is, in my opinion, good news for minority investors. Not only does it confirm the potential of Centro Norte’s airport portfolio, but it also allows it to leverage Vinci’s expertise and global network.

I expect Vinci’s interests to be well aligned with those of retail shareholders, especially in terms of distributions. Finally, the million dollar question: is a total takeover by Vinci in the cards? While Vinci can certainly afford it, I’d be surprised if anything happens in the medium term. Vinci needs to get familiar enough with the Mexican market first, and I think a 30% stake will suit them well at this point.

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