HOCHTIEF's concessions business consists of our airport airport and public-private partnership (PPP) segments.
HOCHTIEF is well positioned to succeed on an enduring basis in these rapidly growing market segments.
A number of factors stand out to differentiate us from international competitors in the concessions business:
The presentation given on the following pages relates to the portfolios of HOCHTIEF AirPort and HOCHTIEF PPP Solutions and their valuation. Leighton's concessions projects are not included.
Ongoing expansion of our core competencies has enabled HOCHTIEF AirPort to take an integrated approach in enhancing the airport value chain. As an investor, the company exercises active responsibility for the development of its holdings into rapidly growing transportation and commerce hubs. In the process we combine vast financing knowledge with years of experience operating and managing airports.
Our airport holdings also gain by exchanging operating knowledge with their peers. Cooperations open the door to added synergies.
Above-average global growth in air transport compared to GDP and rising demand for mobility create strong prospects for lasting success in our airport operating business. This makes airports attractive assets. They deliver good returns at relatively low volatility, offering a stable long-term choice for institutional investors.
HOCHTIEF AirPort is interested in tackling further privatization projects with these three partners, who primarily benefit through attractive returns. Working jointly with HOCHTIEF AirPort makes it possible to overcome barriers to entry. In return, HOCHTIEF earns management and transaction fees from the investment partners. Both they and HOCHTIEF also generate income in the form of dividends and interest on shareholder loans plus any placement profits and gains on disposals of ownership stakes.
HOCHTIEF AirPort's ongoing responsibilities in the working relationship with HTAC include analyzing and proposing suitable new investment opportunities and effecting the transactions themselves.
In October 2006, HOCHTIEF AirPort and two HTAC partners signed a letter of intent for the purchase of the ownership interests in Budapest Airport held by UK airport operator BAA.
In the year under review, HOCHTIEF PPP Solutions secured additional projects. Along with partners, HOCHTIEF PPP Solutions signed concession contracts for two toll highways in Greece. These two contracts are not yet included in the project list because financial close has not yet been reached. In Germany, we will rebuild and operate the A4 highway between Gotha and Eisenach as the leader of a consortium. With the addition of this deal, HOCHTIEF PPP Solutions' portfolio of toll road contracts comprises eight projects with an aggregate investment volume of well over EUR 5 billion. The company is thus responsible for toll roads measuring a total of nearly 800 kilometers.
At the end of fiscal 2007, we sold an indirectly held 12.5 percent in the Vespucio Norte Express (VNE) project in Chile to investor M.M. Warburg & CO for a purchase price of EUR 81.9 million, a move which meant that HOCHTIEF PPP Solutions reduced its interest in the VNE toll highway from 45.45 percent to 32.95 percent.
This sale forms part of the active management of our concessions portfolio, the core element in HOCHTIEF PPP Solutions' strategy. The transaction reduces the amount of capital tied up in the project, creates a structure that can be duplicated for future sales of equity stakes and also documents the net present value of our company's holdings.
The toll highway was placed in service in January 2006, and all construction measures have meanwhile been completed. The income generated by the VNE grew by approximately 30 percent in 2007. Double-digit growth rates continue to be forecast for the coming years, in what is known as the "ramp-up phase".
The value of VNE will reach its highest level between 2010 and 2012. For this reason, a structured sale was developed that enables the terms of sale in 2007 to match the conditions that would be in effect after the ramp-up phase.
We also expanded our portfolio of school projects. In Frankfurt am Main, we were awarded a PPP contract to design, finance, build and then operate four schools. The PPP arrangement helps the city to cut costs by around 15 percent. In addition, HOCHTIEF PPP Solutions will build and subsequently operate a comprehensive school in the Cologne suburb of Rodenkirchen until 2034. Moreover, seven refurbished and modernized schools were handed over in Cologne in March 2007. Our UK subsidiary HOCHTIEF PPP Solutions (UK) added two schools in Scotland to its portfolio. Furthermore, additional schools entered the operating phase in western Scotland, England and Ireland. As of the balance sheet date in 2007, HOCHTIEF PPP Solutions was responsible for 89 schools with more than 60,000 pupils in Germany, the UK and Ireland.
In order to give investors the opportunity to participate in the company's portfolio of schools, HOCHTIEF PPP Solutions pooled six PPP school projects in HOCHTIEF PPP Schools Capital Ltd. at the end of 2006. The contract, which was signed in December 2006, stipulated that HOCHTIEF sell a total of 49 percent of the shares to investor The PFI Infrastructure at a fixed price at the end of 2007. Meanwhile, the investor was acquired by Infrastructure Investors. This company exercised the buy options in the fourth quarter of 2007. The maturity of the projects pooled in HOCHTIEF PPP Schools Capital, their timely completion and increased interest by infrastructure investors led to a further reduction in the discount rate for the sale of the shares. This means that we were able to raise the sale price significantly compared to the preliminary price agreed in 2006.
HOCHTIEF PPP Solutions remains the majority shareholder of HOCHTIEF Schools Capital and retains responsibility for these projects. The price obtained for the sale of the HOCHTIEF shares greatly exceeded the preceding portfolio valuation. We will invest the proceeds in new school projects and thus further reinforce our positioning in this market segment. The school projects were included accordingly in the portfolio valuation table.
In DCF-based valuation, we take the cash flows between the project companies and HOCHTIEF – capital paid in and withdrawn, dividends, interest and fees – and discount the future cash flows by applying a risk-adjusted discount rate.
HOCHTIEF uses a discount rate of 13 percent for existing airport holdings. The placement price obtained on establishment of the investment partnership in 2005 showed this to be in line with market rates.
The total net value of the concessions portfolio thus amounts to EUR 1,543.7 million. The future discounted cash flows exceed HOCHTIEF's EUR 841.2 million investment by some 703 million. In the period under review, we were able to increase this valuation reserve by 53 percent compared to 2006.
| Status: Financial close (EUR million) | Airports | PPP projects | Total |
|---|---|---|---|
| Division* | HTA | HTD | |
| Total capital required | 747.8 | 145.2 | 893.0 |
| Capital provided by Dec. 31, 2007 | 747.1 | 93.4 | 841.2 |
| NPV of expected cash flows at Dec. 31, 2007 | 1,337.8 | 205.9 | 1,543.7 |
| NPV at Dec. 31, 2006 | 825.2 | 242.8 | 1,068.0 |
| Difference due to portfolio growth | 400.4 | -72.2 | 328.2 |
| Difference due to value growth | 112.7 | 35.3 | 147.5 |